March 2009 | Issue 36
In a recent world-wide survey of purchase price allocations in business combinations, Ernst & Young found that the average acquirer allocated 47% of the enterprise value of the transaction (acquisition price plus net financial debt) to goodwill. Of the balance, 30% was allocated to tangible assets, and the rest, 23%, to identified intangible assets.
The most commonly reported category of identified intangible was customer-related assets, followed by brands/trademarks and technology.
As might be expected, allocations varied widely by industry. For example, in consumer product company acquisitions, the average goodwill allocation was 65% of enterprise value. At the other end of the spectrum was oil and gas, where the goodwill allocations averaged only 30%. The largest recognized intangible asset allocations occurred, not surprisingly, in the tech-heavy pharmaceutical and biotechnology industries, at 49% and 47% of enterprise value, respectively.
Companies did not generally disclose the method employed to value their assets. When they did, however, the study authors found the most-often used method for valuing brand names was the relief from royalty method. For customer-related intangibles, the multi-period excess earnings method was most common
E & Y gathered this data from descriptions of 709 transactions found in annual reports and other public sources. The data included 247 transactions of US-based companies. The balance came from companies in 20 other countries. A copy of the report is available here.