For the cash that is paid by an aquirer to the company being acquired, lets say $100 million, where does it go? From the CFAI mock exam, it appears to go into the equity of the acquired company’s balance sheet.
It goes to the pockets of the shareholders, not to the equity of the company. By giving that money you become the new owner (new holder of the equity section of the Balance Sheet). What you buy is not new shares but previosly issued shares held by previous shareholders. Money goes to the company only if you purchase assets from the target.
Would it be correct then to say that if the $100 million was paid in cash, we would deduct $100million from the cash account in the balance sheet after the consolidation? What would happen if the $100 million was paid using the acquirer’s shares instead of cash? How would the consolidated balance sheet be affected?
2010CFACFA Wrote: ------------------------------------------------------- > Would it be correct then to say that if the $100 > million was paid in cash, we would deduct > $100million from the cash account in the balance > sheet after the consolidation? That’s correct, those $100 million are in the hands of the previous shareholders now, not in the vault of the company. > > What would happen if the $100 million was paid > using the acquirer’s shares instead of cash? How > would the consolidated balance sheet be affected? In that case, cash account of the acquirer would not be affected, but acquirer would need to issue new shares amounting to $100 million and give those shares to the previous shareholders of the target. Think that the target’s net assets’ worth is $100 million, so, after consolidation the assets of the acquirer would grow by $100 million and its equity (through newly issued shares) would also grow by $100 million and that grown part of equity belongs to the previous shareholders of the target.
The follow up questions to the acquisition using share: I know that under consolidation method, the invested equity is bough out and so it is not shown in the consolidated statement. This makes sense–cash leaves and reduced A and RE. So when the buyout happens with shares, where are the $100M new share reported under? Are they simply reported under the consolidated Equity? But then this is not the equity that Investor controls, so how does that work.
> But then this is not the equity that Investor > controls, so how does that work. As I wrote before, the added $100 million part onto previous amount of equity belongs to the target’s shareholders who you actually paid to.
Slatibartfast07 Wrote: ------------------------------------------------------- > The follow up questions to the acquisition using > share: > > I know that under consolidation method, the > invested equity is bough out and so it is not > shown in the consolidated statement. This makes > sense–cash leaves and reduced A and RE. > > So when the buyout happens with shares, where are > the $100M new share reported under? > Are they simply reported under the consolidated > Equity? > But then this is not the equity that Investor > controls, so how does that work. Company A is giving Company B (acquiree) shares of their company. Afterwards, they are all equal.