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GOODWILL ACCOUNTS FOR 47% OF AVERAGE M & A ALLOCATION

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.

Hempstead & Co. is an independent financial consulting firm specializing in the valuation of businesses and corporate securities. During our 30 years in the profession, we have prided ourselves on the high quality of our work. We would welcome the opportunity to be of assistance to you.