One of the changes i observed in the 

#mergersandacquisitions transactions in the last

year is the increase in Step acquisitions, where a buyer purchases a controlling stake
(greater than 50% and less than 100%) of the target and then buys the remaining non-
controlling stake in the future that is different from the acquisition date.

In such an acquisition, the buyer has to consolidate 100% of the target financials with its
financials and then record the stake it does not own separately on its shareholder's
equity section of the balance sheet as a non-controlling interest. Further, the net income
corresponding to the non-controlling interest should be reflected separately in the
consolidated income statement.

For instance, assume an IT company A acquires a controlling stake of 80% of the

outstanding shares of Company B.

No of shares acquired = 30 million.

Stake acquired = 80%
The price paid by A /Share of B = $22
Intrinsic value/Stock price of B = $20
The corporate Tax rate for A = 30%

As buyer A acquires a controlling stake of 80% in target B, it pays a control premium of

20% ($2/share).

Purchase Price Allocation and Determination of Goodwill are as follows:

- Calculate the fair market value of B's book assets

- Purchase price = 22*30 = $660 million
- Fair value of non-controlling interest = 20*(1-80%)*(30/80%) = 150 million
- Fair value of Target B = $660+150 = $810
- Deduct the Book value of Net Assets of Target B = $180
- Excess of Fair value of BVNA = $810 - 180 = $630

We must allocate $630 over the fair value of asset B, and the remaining gets allocated as
Goodwill.

As it is a stock acquisition, the buyer write-up the net assets for book purposes but
cannot do it for tax purposes resulting in a deferred tax liability.

DTL = (Fair value of Target assets - Tax basis) * Tax rate

Total Goodwill = $385

However, the buyer must allocate the Goodwill of non-controlling interest.

Thus, the buyer must determine the Goodwill of controlling interest.

Goodwill of controlling interest = $660 - ($530*80%) = $236.

Goodwill of non-controlling interest = $385-236 = $149.

As accounting recognizes Goodwill as an indefinite intangible asset, the buyer cannot

amortize the Goodwill but test for impairment annually. However, for tax purposes, the
buyer can amortize the Goodwill over 15 years.

Further, suppose the buyer, over a period, wishes to acquire the remaining 20% of the
target. In that case, the buyer need not determine the fair value of the net assets of the
subsidiary on the date when it acquires the non-controlling interest.

I have attached the working of this deal below.

If you want the working of the sheet, please comment along with your mail id. I shall
share the sheet with as many people as possible.