21: Mergers, Acquisitions and Corporate Control$10 million, and the fair value of its long-term assets is $60 million. Deducting the $5 million in current liabilities
and $25 million in long-term liabilities, the target company has a net asset value of $40 million. Thus, the
acquiring company is willing to pay $20 million ($60 million less $40 million) for intangible assets that represent
the premium paid to acquire the R&D capabilities.
Current assets $10,000,000
Long-term assets 60,000,000
Less: Liabilities 30,000,000
Net asset value $40,000,000
Purchase price paid 60,000,000
Less: Net asset value 40,000,000
Goodwill $20,000,000Pre-acquisition Post-acquisition
Acquirer’s financial
statements
($ millions)Target’s financial
statements
($ millions)Fair values of target
assets and liabilities
($ millions)Consolidated financial
statements ($ millions)Assets
Current 100 10 10 50*
Long-term 350 50 60 410
Goodwill 0 0 20
Total assets 450 60 480**
Liabilities
Current 50 5 5 55
Long-term 250 25 25 275
Total liabilities 300 30 330
Owners’ equity 150 30 150***
Total liabilities and owners’
equity450 60 480
- If the acquirer used $60 million cash to make the acquisition, consolidated current assets = 100 + 10 – 60 = 50.
** If the acquirer used $60 million cash to make the acquisition, consolidated total assets = 450 + 70 + 20 – 60 = 480 (Acquirer’s assets + Fair value of
target’s assets + Goodwill – Payment for target’s shares).
*** In consolidated statements, only the shares held by outside investors are shown.
Assume that the target company is treated as a separate reporting unit after the acquisition. Going
forward, the company must evaluate its goodwill to determine whether its value has been impaired. As long
as the company can demonstrate that the goodwill’s fair value has not fallen below its carrying value of $20
million on the balance sheet, then it will remain unaffected on the balance sheet. However, if the value is
impaired (that is, fair value has decreased), then the value loss must be reported, deducted from the balance
sheet and taken as a write-off against current period earnings. For example, assume that two years later the
R&D capabilities of the subsidiary do not turn out to be as valuable as expected. The fair value of the reporting
unit is estimated at $55 million, and the fair value of the net assets is estimated at $50 million, resulting in an
implied fair value of the goodwill of $5 million. Because the carrying value of the goodwill is $20 million, this
represents a $15 million impairment. This $15 million will be deducted from the balance sheet and taken as
an intangible asset write-down on the income statement, reducing earnings by $15 million in the year that the
impairment is recognised.
example