Walk me through what happens on the financial statements immediately after a Buyer acquires a 70% stake in a Seller worth $500

Question: Walk me through what happens on the financial statements immediately after a Buyer
acquires a 20% stake in a Seller worth $500 million using 50% Cash and 50% Debt.

Answer:
In this case, you apply purchase accounting and must consolidate the financial statements and
create Goodwill because the Buyer acquires more than 50% of the Seller.

You start by creating Goodwill based on the Seller’s Equity Purchase Price of $500 million minus
its Common Shareholders’ Equity and any Asset write-ups (and other adjustments).

Then, you add together the Buyer and Seller’s Balance Sheets and other financial statements
100%, but you write down the Seller’s Common Shareholders’ Equity.

Then, you record a Noncontrolling Interest for the portion of the Seller that the Buyer does not
own, which is 30% * $500 million = $150 million here.

Since it’s a 50 / 50 Cash / Debt deal, the Cash balance on the Assets side declines by $75 million
and the Debt on the L&E side increases by $75 million.

The Balance Sheet appears to be out of balance, but that’s because we haven’t yet factored in
Goodwill since we didn’t have enough information to calculate it. Once we do that, the Assets
side will equal the L&E side.

**My question to WSO is: Why is Cash going down by $75M and Debt is going up by $75M? **

 
Most Helpful

Man this doesn't even make much sense.

First of all, you start by saying they acquire 20%. But then the answer states that the portion they did not acquire is 30%?

Then the 50% cash/ 50% debt is based on $150m. $150m is neither 20% stake nor 70%.

Granted, I'm a POS in trading that doesn't know much about accounting but here is what I think:

1. Assume the buyer acquires 70% in a seller worth $500mm using 50/50 cash/debt.

a. You create the goodwill (based on what you mentioned)

b. You consolidate assets and liabilities

c. You record a noncontrolling interest = $150mm

d. Since its 50 cash/ 50 debt, cash would go down by $175mm and debt would go up by $175mm.

Let's assume the company has $1B in assets, $700m in liabilities, and $300m in SE

a. Goodwill is $200m ($500m value - $300m SE)

b. Assets go up by net amount of $825m ($1b assets - $175m cash [50% of the 70% stake])

c. Liabilities go up by $875m ($700m + $175m debt [50% of the 70% stake])

d. You add $200m goodwill to asset side, leaving you with $1,025m.

e. You add $150m of noncontrolling interest (30% x $500m) to L&E side, leaving you with $1,025M.

1,025M - 1,025M = 0

 

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