Class 8 M&A.docx - M&A GAAP Buying a company with...

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M&A GAAP: Buying a company with appreciation The company owns: Basis FMV Cash 400,000 400,000 Inventory (FIFO) 600,000 700,000 Machine 700,000- 100,000 600,000 800,000 Land 1,400,000 7,100,000 Total 300,000 9,000,000 No liabilities The company has 3,000,000 asset = 0 liability + 3,000,000 equity bought by 100% The company is worth 9,000,000 So the buyer spends 9,000,000 for the 3,000,000 equity, the equity is overpaid by 6,000,000 It is not goodwill It should be called purchase premium Write-up of physical asset Write-up of intangible asset gain in category Write-ups have ripples. For accounting side, by buying asset or equity, the physical write-up will get more depreciation and lower income in future. The intangible write-up will be amortized depending on the character of the intangibles. The buyer CANNOT get write-up if they buy equity/stock, and no extra depreciation , amortization and tax shield they don’t exist. So although you pay premium for those write up, the basis you get is the same as the book value of those assets.
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  • Spring '14
  • MaryE.Hillenbrand

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