Purchase Accounting for Noncontrolling Interests AKA Minority Interests (22:59)
In this video, you’ll learn how to complete the purchase price allocation and Balance Sheet combination process when a buyer acquires between 50% and 100% of a seller, and how it’s different when the buyer’s stake goes from, say, 30% to 70%, compared to when it goes from 0% to 70%.
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Step 1: Transaction Assumptions:
Need to assume a certain existing stake, and then an additional stake acquired such that the total post-transaction stake ends up being between 50% and 100%.
Assuming here that the target is public, so we also need to assume a price per share and # of shares outstanding.
Relevant Numbers to Calculate:
1. What is 100% of the seller’s Equity worth? We need that for Goodwill and Noncontrolling Interest calculations later on.
2. What is the buyer’s current stake in the seller worth? We need this to determine what the buyer’s Balance Sheet looks like before the deal happens.
3. How much is the buyer’s additional stake in the seller worth. We need this to calculate the cash, debt, and stock used.
4. How much is the buyer’s post-transaction stake in the seller worth? We need this to calculate the Noncontrolling Interest.
Step 2: Sources & Uses and Purchase Price Allocation:
Largely the same as with any other deal; the only points to be careful of are:
1. Sources and Uses should be based on the stake acquired, not 100% of the seller’s value…
2. But Goodwill and PPA should be based on 100% of the seller’s value!
Step 3: Combining the Balance Sheets:
You always combine the Balance Sheets, and the other financial statements, whenever the buyer goes from a stake under 50% to a stake over 50% in the seller.
The steps to doing this are nearly the same as in any other M&A deal for 100% of another company…
1. Adjust Cash – For the cash used to fund the deal, and any cash paid for transaction / financing fees.
2. Write Up Assets – Adjust PP&E, Goodwill, Other Intangibles, and Capitalized Financing Fees.
3. Adjust Debt – Reflect new debt used to fund the deal, possible refinancing of existing debt.
4. Adjust the DTLs – Typically write off existing DTL and create a new one.
5. Adjust Shareholders’ Equity – Wipe out the seller’s existing Shareholders’ Equity and reflect any stock issued in the deal.
So… what’s different? Just 2 things, really:
1. Equity Investments / Associate Companies – You have to wipe this out, if it exists, because now the buyer owns over 50% of the seller and it completely consolidates the statements instead.
2. Noncontrolling Interest – You have to create one if the buyer owns above 50% but less than 100% of the seller.
Simple calculation: Value of 100% of the seller’s Equity Value minus the stake the buyer owns post-transaction.
Step 4: What Does This Look Like Under Different Scenarios?
0% to 70% Stake: Very straightforward – the only real difference is that a Noncontrolling Interest is created, which ensures that the Balance Sheet balances.
30% to 70% Stake: A NCI is created, just as in the case above, AND the existing Equity Investment goes away.
30% to 100% Stake: No NCI is created, but the existing Equity Investment goes away.
0% to 100% Stake: No NCI is created and there is no existing Equity Investment; just a normal M&A deal then.
Cash vs. Stock vs. Debt Mix: Doesn’t matter for the NCI or Equity Investment or Goodwill treatment at all – only impacts the adjustments to cash, debt, and stock on both sides of the Balance Sheet.