I have been reviewing M&A and LBO analyses, and I noticed that existing target goodwill is being treated differently between the two analyses.
M&A
– Existing target goodwill is not included in the combined entity's goodwill
– Post-transaction Goodwill = Goodwill Created in Transaction + Acquirer Goodwill – Target Goodwill
LBO
– Existing target goodwill is included in the post-transaction entity's goodwill
– Post-transaction Goodwill = Goodwill Created in Transaction + Target Goodwill
Do I have this right? If so, I would appreciate a brief explanation on the treatment of target goodwill.
Thanks
Good question, looks right to me.
GW is created during any sort of change of control be it buyout or M&A. With M&A, the target's GW goes away because their balance sheet is absorbed by the acquirer. You're effectively already accounting for the GW on the books during the purchase price allocation (you write it off because it's no longer a standalone company which increases the amount of new GW created). Kinda confusing but the net is that the old GW of the target is included in the new GW from the PPA.
For a buyout, it's the same thing. You write-off the existing GW, and then you allocate out the new PP. A lot of times this is shown as a net adjustment but as long as the PF GW balance is what was calculated in the PPA then it's fine.
Thanks–this makes sense.
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