3.3·6 min read

Goodwill

Goodwill is the premium that isn't tied to identifiable assets. It's the plug that makes the combined balance sheet balance.

By the end you can

✓Compute goodwill created in a deal
✓Explain how goodwill behaves after close

\text{Goodwill} = \text{Purchase Premium} - \text{Asset Write-Ups} + \text{DTL}

Whatever premium isn't allocated to tangible/intangible write-ups becomes goodwill; the DTL adds back because it's a liability assumed.

Worked example · Back into goodwill

Given

• $2,000M
• $700M (PP&E $500 + intangibles $200)
•Tax rate 20%

Solution

1.DTL created
$20\% \times 700 = \$140\text{M}$
2.
$2{,}000 - 700 + 140 = \$1{,}440\text{M}$

Answer

About $1.44B of is created - the part of the price not pinned to any specific asset.

Goodwill isn't amortized

Under current US GAAP, sits on the balance sheet indefinitely and is tested for impairment. If the acquired business is later worth less than paid, is written down in a one-time charge - which is why huge impairments (e.g., AOL-Time Warner) signal a deal gone wrong.

Check yourself

Premium $1,000M, write-ups $300M, DTL $60M. Goodwill created:

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Write-Ups, D&A & the DTL

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From Standalone to Pro Forma