A significant proportion of the deal value in a merger and acquisition transaction is allocated towards intangible assets, reflected by the underlying products, brands, intellectual property and customer relationships, says a study by EY.
According to the EY based on annual reports of top 500 listed companies in India by market capitalisation from FY2017 to FY2020, 31% of the enterprise value of the acquired companies was allocated to identified intangible assets.
An intangible asset is an asset that is not physical in nature. Goodwill, brand recognition and intellectual property, such as patents, trademarks, and copyrights, are all intangible assets.
The study further noted that 34% of the enterprise value of the acquired companies was allocated to ‘goodwill'. Goodwill is the amount paid in excess of the target company's net value of its assets minus its liabilities.
As per the study, the allocation to goodwill in India is largely in line with the proportion allocated in global deals (like in the U.S.).
In sectors like consumer products, life sciences, information technology, information technology enabled services and retail, majority of the deal value is allocated to intangible assets.
For sectors like real estate and hospitality, and energy, which are capital intensive, more than two-thirds of the enterprise value is allocated to the tangible assets.
Transactions with enterprise value less than Rs 10 crore and with goodwill more than 100% of the enterprise value were ignored. A total of 396 transactions were found where adequate information about purchase price allocation was disclosed.
Purchase price allocation is a practice in which an acquirer allocates the purchase price into the assets and liabilities of the target company acquired in the transaction. It is an important step in accounting reporting after the completion of a merger or acquisition.
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