In an M&A deal where Company A acquires Company B, and pays with shares in Company A, is goodwill created? I am thinking that this might depend on the relative values of the stocks used and whether Company A pays an amount of stock that corresponds to those relative values.
Thank you in advance!
Depends. When you buy a company, regardless of how it was paid for, you will probably pay more than the book value. At closing, the newly acquired company has to determine the Fair Value of the assets and liabilities, equity is set via the purchase price. If there is residual asset value after determining the FV of PPE/other intangibles, then yes, you will have goodwill. If the purchase price is too low, you could have negative goodwill which then requires economic obsolescence to be forced onto the PPE (excluding land) so that you arrive at a 0 goodwill value.
To put it another way, in an acquisition, you have to reset the book value (by determining FV) to correspond to the purchase price. In doing so, you may or may not find goodwill.
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