Q. What are net identifiable assets?
Net identifiable assets equal the total value of a company’s identifiable assets minus the value of its liabilities. Identifiable assets and liabilities can be identified and a value can be ascribed at a specific point in time (i.e. quantifiable).
The net identifiable assets, more specifically, is the book value of assets belonging to an acquired company after liabilities have been deducted.
All identifiable liabilities that played a role in the acquisition must be considered and all identifiable assets – both tangible and intangible assets – must be included.
Q. What does accretion/dilution analysis tell you about an M&A transaction?
After a merger or acquisition, when the pro forma EPS is greater than the acquirer’s pre-deal earnings per share (EPS), the transaction is accretive. But if the pro forma EPS is less than the acquirer’s standalone EPS, then the transaction was dilutive.
While the term “accretive” in M&A carries a positive connotation, it does not necessarily mean that the acquirer realized synergies or that there was significant value creation (and the same rule applies to dilutive deals).
Instead, the actual reason that corporates pay close attention to the post-deal EPS is because of the market reaction. For example, the market can perceive a dilutive transaction as a poor decision, which can cause the acquirer’s share price to decline because some investors will apply the pre-deal price-to-earnings (P/E) ratio to the now-reduced pro forma EPS.
In reality, public companies fear the reaction from the public markets (and a subsequent drop-off in their share prices). In fact, many dilutive deals are still completed, i.e. a transaction can be dilutive and still turn out to be a great strategic acquisition.
Sample Questions and Answers:
I’ve already listed the main question variations above.
For sample answers, here are a few examples of how you can answer this question like a pro, taken from our article on how to answer the “Walk me through your resume” question:
And if you’re more of a visual learner, here’s a video tutorial on how to answer the “Walk me through your resume” question:
Q. What is goodwill in M&A?
Goodwill is an intangible asset on the balance sheet that captures the premium paid in excess of the fair value of the net identifiable assets, i.e. the excess purchase price.
It is common for acquirers to pay more than the fair value of the target’s net identifiable assets, so goodwill is a common line item for companies that are active in M&A.
Overpaying for assets frequently occurs due to mistakenly overestimating potential synergies, not performing sufficient diligence, or competing in a competitive auction sale process.
As discussed previously, the carrying value of the purchased assets and liabilities are adjusted to their fair value post-acquisition.
But still, there can be residual value left over (i.e. the excess purchase price that far exceeds the fair value of the purchased assets).
Therefore, the purchase price is subtracted from the net amount, with the resulting value recorded as goodwill on the balance sheet.
Goodwill is recognized on the books of the acquirer and the value remains unchanged (i.e. goodwill is not amortized), but it can be reduced if the goodwill is determined to be impaired, i.e. if the acquirer overpaid for assets and now realizes just how much less it is actually worth.