Advanced Qs Flashcards
What’s the purpose of Purchase Price Allocation in an M&A deal? Can you explain how it works?
To make the combined BS balance
- you look at every single item on the seller’s BS and then assess the fair market values of all those items.
- goodwill and OIA act as the plug
Explain the complete formula for how to calculate Goodwill in an M&A deal.
Goodwill = Equity Purchase Price – Seller Book Value + Seller’s Existing Goodwill – Asset Write-Ups – Seller’s Existing Deferred Tax Liability + Write- Down of Seller’s Existing Deferred Tax Asset + Newly Created Deferred Tax Liability + Intercompany Accounts Receivable – Intercompany Accounts Payable
Why do we adjust the values of Assets such as PP&E in an M&A deal?
Because often the fair market value is significantly different from the BS value.
- e.g. real estate, usually appreciates over time, but due to rules of accounting, must depreciate on BS
What’s the logic behind Deferred Tax Liabilities and Deferred Tax Assets?
- write down most of seller’s existing DTLs and DTAs to reset its tax basis now its part of another entity
- may create new DTLs or DTAs if there are Asset write-ups or write-downs and the book and tax D n A numbers differ
What happens for asset write ups for DTAs or DTLs
Asset Write-Ups:
Impact: When assets are written up, the book value of these assets increases.
Depreciation Differences: The increased book value leads to higher book depreciation compared to tax depreciation, as the tax basis (original value for tax purposes) remains lower.
Result: This discrepancy means the company will have higher book income but lower taxable income in the short term, resulting in a DTL. The company will pay more in cash taxes in future periods when the book depreciation exceeds tax depreciation.
Asset write down impact on dta and dtl
Impact: When assets are written down, the book value of these assets decreases.
Depreciation Differences: The decreased book value leads to lower book depreciation compared to tax depreciation, as the tax basis is higher.
Result: This discrepancy means the company will have lower book income but higher taxable income in the short term, resulting in a DTA. The company will pay less in cash taxes in future periods when the tax depreciation exceeds book depreciation.
How do you treat items like Preferred Stock, Noncontrolling Interests, Debt, and so on, and how do they affect Purchase Price Allocation?
Usually added to total consideration
So do you use Equity Value or Enterprise Value for the Purchase Price in a merger model?
PPA schedule based on equity purchase price, but actual amount pf cash/stock/debt used is based on that EPP + additional funds needed to repay.
- normally labelled funds required in a model
How do you reflect transaction costs, financing fees, and miscellaneous expenses in a merger model?
You expense transaction and miscellaneous fees (such as legal and accounting services) upfront and capitalize the financing fees and amortize them over the term of the debt.
Expensed transaction fees come out of Retained Earnings when you adjust the Balance Sheet (and Cash on the other side), while Capitalized Financing Fees appear as a new Asset on the Balance Sheet (and reduce Cash immediately) and are amortized each year according to the tenor of the debt.
How would you treat Debt differently in the Sources & Uses table if it is refinanced rather than assumed?
If the buyer assumes the Debt, it appears in both the Sources and Uses columns and has no effect on the Funds Required.
If the buyer pays off Debt, it appears only in the Uses column and increases the Funds Required.
Difference between PPA, EPP and funds required
Purchase Price Allocation (PPA): Focuses on how the total consideration is allocated among the acquired assets and liabilities.
Funds Required (Total Consideration): The overall amount needed to complete the acquisition, including cash, stock, assumed liabilities, and other forms of payment.
Equity Purchase Price: The specific amount paid for the target company’s equity, excluding assumed liabilities.
