Balance sheet after an acquisition (shareholders equity)
Okay.. I am so confused by the combined balance sheet after an acquisition.
I knew it creates Goodwill but I thought it was because purchase price is usually bigger than the value of company.. like paying control premium and stuff.
But I have searched and found out... it wipes out the shareholders equity of the acquired company ....not carrying on..
Let's say A purchase B with $100 and B's equity value is only $20.. Then, what happens to shareholders' equity of BS on new company? I know there will be increase in goodwill or PP&E, whaterever on asset. BUT, what happens to shareholders' equity?
the excess purchase price goes to commonstock or apic? to where?
Please help me out... Thank you so much in advance!
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It doesn't wipe out shareholders' equity (SE) so much as re-characterize it. The Target's assets and liabilities get revalued and put directly onto the Buyer's balance sheet (these values may be different from the Target's carrying values). The difference between the revalued assets and the revalued liabilities is essentially the Target's GAAP equity at the moment of acquisition (let's call this Q). You do not add that to the Buyer's SE under GAAP because we use purchase accounting = If the purchase price is more than Q (which it usually is), the excess goes into goodwill. If less, then it is negative goodwill (I have only seen this once in 12 years of leveraged lending). Hope this helps. Cheers!
I’m not sure I’m understanding you’re question. A lot of that would depend on the capital used for the deal (cash vs stock).
smart. i bow
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