Looking at a transaction that has a rollover equity component. The agreement specifies a share price. However, it looks like GAAP says you need to fair value this equity and not just use the agreed share price when doing the purchase accounting.
What is the rationale behind that? The guidance seems like it's implying the agreed share prices are too high since rollover equity is likely to subordinated, but why wouldn't this be baked into the deal already? Wouldn't it make sense to use the actual agreed-to price?
Interested to hear on this
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Both your intuition and GAAP are correct. GAAP requires equity to be booked at FMV. Unless there is an (unusual) circumstance where someone gets rollover at a discount or a premium, FMV = the price in which a recent transaction occurs.
You could imagine a scenario where a unfriendly sponsor would invest at $X, and ask management to rollover at $X + some amount. In that case, unless you had a really good reason, I'd expect GAAP would say the FMV of the rollover is at $X per share.
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