ASC – 805 Purchase Price Allocation

THE DEAL:

  • Company A / The Acquirer (Client): The acquirer is a provider of interactive technology products like, large-format displays and collaboration software.
  • Company B / The Target: The target company develops software applications for use with multi-touch technology.
  • The transaction was an all-stock deal which closed in 2015. The purchase price was a combination of upfront payment and milestone based payments.

THE CHALLENGE:

  • Allocation of purchase price among various tangible and intangible assets at their fair value using appropriate allocation methods, and report the goodwill created through the transaction.
  • Determining the present value of earn-out payments, which were dependent on the revenues and profits generated by Company B during the “Earn-Out Period”.

OUR SOLUTION:

  • Various intangible assets were identified and their present values were determined using appropriate valuation methodologies. For example:
    • Technology – Identified as the key asset acquired, it was valued using the Multi-Period Excess Earnings Approach.
    • Trademarks/Tradenames – They were valued using the Relief from Royalty Approach.
    • Non-Compete Agreements – We utilized a “With/Without” Approach to value non-compete agreements. Non-competition agreements for key individuals were evaluated on three parameters – ability to compete, feasibility of competition, and desire to compete.
    • Customer Relationships – We applied a Cost Approach based on the assumption that the Company had to incur certain expenses to acquire and retain a customer.
    • Assembled Workforce – It was valued only for the computation of the appropriate contributory asset charge.
  • Estimation of “Earn-Out” payments: As part of the deal covenants, Company A (acquirer) was obliged to pay Company B (target), a pre-determined amount of cash and shares in the event of Company B achieving certain sales and EBIT thresholds during the “Earn-Out Period”. For projecting the earn-out payments and capturing the high uncertainty around them, we utilized the Monte-Carlo simulation.

FINAL ALLOCATION OF THE PURCHASE PRICE