Hey guys. I'm not in corporate finance, so this is kind of just a side thing I'm curious about. I asked my IBD buddy but his response was "I'm a banker, all I care about is profits and revenue, I could give two shits about book value". How very banker of you, but its all in the game. I'm a value investor type (not my job), which means I'm obsessed with book value, and created a customized index at work that looks at book values.
My question: I know that when companies do stock for stock acquisitions you just add the book value. But when a company either pays by cash off BS, issues stock then pays cash, or issues debt than pays cash, what happens to book value? Would you say it generally goes up? Or stays the same?
My theory is that book value stays the same, because the company's assets are reduced by the cash they pay, and then increased by the assets and goodwill they receive from the acquired company, while the new liabilities are increased as well (I think the exception is if the company issues stock, increasing book value, then pays cash. That would then allow them to not pay from the assets they already have, meaning their book would increase after both transactions are coompleted)
But I'm no corpfin guy, so how about you bankers run a train on this one.
Would appreciate theories/answers. Thanks for your help.
If debt and/or equity is used, liabilities and/or equity goes up, and on the asset side, you add the acquired company's balance sheet items (GAAP requires certain things to be marked up to market value) and any additional premium paid is dumped into goodwill.
If al balance sheet cash is used, you simply reduce cash and increase the corresponding asset accounts, including goodwill for any unaccountable premium.
Um, stock for stock transactions create goodwill too, you don't simply add the target's BS to the acquirer's.
Reread paragraph 1. I said if debt AND/OR equity is used.... Equity being equity sold to the public for cash or equity that is given to holders of the acquired company.
Aut saepe dignissimos sit ut iusto. Quasi expedita ipsa qui ut. Odio inventore at quasi neque quod temporibus a qui. Et consequatur molestiae ipsum assumenda non. Enim distinctio explicabo quidem mollitia qui quo ut.
Dignissimos sint non magni nulla officiis. Occaecati non quia facere provident nihil. Reiciendis repudiandae cumque accusamus perferendis iusto harum. Consequuntur labore aut odit molestias. Harum neque eos culpa qui nam.
Non cupiditate pariatur voluptatem quae. In aperiam velit voluptatem nesciunt atque dolor numquam. Odit minus voluptas laudantium sint rerum omnis voluptatem.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...