This paper reviews relevant accounting implications and domestic transaction trends over the past 10 years involving partial and step acquisitions. Partial acquisitions, where less than 100% of a target entity is acquired, are one avenue to mitigate the risk of failure in M&A transactions.
In analyzing domestic M&A transaction activity over the past 10 years, the authors defined partial acquisitions as any transaction within the initial search criteria whereby less than a 100% interest in the target entity was sought.
Step acquisitions were defined as any transaction within the initial search criteria that disclosed majority or minority shareholder activity involving defined increases in remaining shares, majority control or ownership stake. A detailed chart of these results accompanies the article.
Increasingly, 40% to 50% of step acquisition target entities were domiciled outside the United States, with an increasing trend toward nondomestic deals during the past decade. This trend supports one benefit of partial acquisitions, as step acquisitions allow an acquirer to gain familiarity with the operations and laws in a particular foreign jurisdiction prior to transitioning to a controlling or wholly owned investment.
Moreover, when the acquirer’s post-transaction cumulative ownership percentage exceeds 50%, the acquirer is required to consolidate the entity on its balance sheet via the acquisition method of accounting (assuming the acquired business is defined as a “business”).
The article then notes and explores that while every step acquisition does not require a change in accounting treatment, there are certain triggers that result in a change to the accounting treatment and any resulting valuation requirements.
The accounting rules surrounding partial and step acquisitions differ based on the total ownership interest held by the acquirer. In general, with post-transaction ownership percentage less than 20%, the Cost Method is used; between 20% and 50%, the Equity Method; and greater than 50%, the Consolidated Method.
In addition, at the point of consolidation, the reporting entity must recognize under U.S. generally accepted accounting principles (GAAP) at the acquisition date: 100% of the identifiable net assets, as measured in accordance with Financial Accounting Standards Board Accounting Standards Codification (ASC) Topic 805; non-controlling interest at fair value; and net goodwill, with its formulation explained.
The article concludes with a hypothetical example of a step acquisition of a business when control is obtained for a U.S. GAAP company.
By, Jason Muraco, Managing Director in the Valuation Advisory group at Stout and John Durbin, Vice President in the Valuation Advisory group at Stout.
Content originally from Transaction Advisors
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