How would an acquisition impact the EV and B/S of an acquirer?

Hi,

I have been fooled by this question in the past. I just wanted your opinion on my solutions. Imagine Company A acquires Company B:

  1. How much would the EV of Company A increase?
  2. What change would occur on the B/S of company A due to this acquisitiion?

Data:

Company B:
Assets = $160
Liabilities = $40
SH Equity = $120

Company A purchases Company B for $140 with $40 in cash, $60 in Debt, and $40 with new common stock.

Solution:
1. EV of Company A would increase by $180. Debt = +100, SH. Equity = +40, Cash = -40.
2. Both sides of the balance sheet of Company A would increase by $140. (Assets = +120, Goodwill = +20, Liabilities = +100, SH. Equity = +40)

Thanks !

 

I'm pretty brand spanking new to this stuff, but slowly learning. Can anyone walk me through the Goodwill and Shareholder equity calculation please? I want to make sure I'm seeing it the right way.

 

The book value shareholders equity is the simple Assets - Liabilities = Shareholders Equity (160 - 40 = 120). In the simplest terms, Goodwill is the value of the purchase price over the book value shareholders equity, thus in this case the purchase price is 140 and shareholders equity is 120 thus 140 - 120 = 20

The full solution for part II looks like:

Assets: +160 Acquired Assets +20 Goodwill -40 Cash (used to fund transaction) Total = 140

Liabilities and Shareholders Equity: +40 Acquired Liabilities +60 Debt (used to fund transaction) +40 Additional Stock Issued (used to fund transaction) Total = 140

 

it should be $180. EV (merged) = EV (Acquirer)+ EV (target) + Premium. For a given purchase price, the EV (merged) firm wouldn't change with method of financing ie. cash/debt/stock.

Premium = $20 EV (target) = Liabilities + Sh. Equity = 40 + 120 = $160 So, EV (merged) increased by 20+160 = $180.

Note: we are assuming that there is no difference between book and market values for debt and equity here. In principle, EV is a market-based concept and has no connection to book value.

 

Voluptatem quia deleniti qui debitis et debitis. Est perspiciatis adipisci amet nihil. Nam reprehenderit laboriosam amet facilis autem voluptatum saepe. Dolores doloremque id qui quia aperiam.

Aliquam aspernatur sit cum praesentium qui. Velit dolores omnis sapiente sit. Omnis facere magni molestiae error impedit voluptatem laudantium. Tempore nihil rem sed blanditiis quia assumenda et. Ullam assumenda qui dolore corrupti ad laborum id. Quia maxime quisquam non rerum quo voluptatem odit.

Quo at temporibus et reiciendis incidunt enim non. Consequatur est sed alias cumque sapiente. Magni a sunt possimus vitae expedita.

In the words of the ancients, one should make his decision within the space of seven breaths. It is a matter of being determined and having the spirit to break through to the other side.

Career Advancement Opportunities

March 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. (++) 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

March 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

March 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

March 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (86) $261
  • 3rd+ Year Analyst (13) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (202) $159
  • Intern/Summer Analyst (144) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Secyh62's picture
Secyh62
99.0
3
BankonBanking's picture
BankonBanking
99.0
4
Betsy Massar's picture
Betsy Massar
99.0
5
dosk17's picture
dosk17
98.9
6
CompBanker's picture
CompBanker
98.9
7
kanon's picture
kanon
98.9
8
GameTheory's picture
GameTheory
98.9
9
DrApeman's picture
DrApeman
98.9
10
Jamoldo's picture
Jamoldo
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”