Module I· Goodwill, Intangibles & ImpairmentAdvanced
Question
How do you model PPA effects in a forecast DCF for an M&A acquisition?
Answer
Mechanics
The standard PPA layer in any acquisition model — the key components and their forecast effect:
| Component | Effect |
|---|---|
| Goodwill | On the balance sheet, no D&A effect under IFRS, separate impairment test |
| Identifiable intangibles | D&A over their life in the P&L — reduces reported EBIT, NOT EBITDA |
| PP&E step-up | Higher D&A in later years — reduces EBIT, not EBITDA |
| Inventory step-up | Realized as COGS in the first 1–2 quarters after closing — a one-time COGS and EBITDA hit |
| DTL from step-up | In an asset deal: a DTL builds up and reverses over 5–15 years |
Deep diveShow more details
Modeling approach
- Show both 'reported EBITDA' and 'reported EBIT' — PPA effects come through primarily below EBIT.
- FCF: the cash D&A of the PPA intangibles is 0 (non-cash), so FCF is not directly burdened. The tax shield on deductible D&A adds to FCF (in the asset-deal case).
- Taxes: the asset-deal vs. share-deal difference is material (see #689, tax step-up).
Example
$100m of goodwill and $50m of customer relationships (10-year life) produce a PPA D&A of $5m in year 1. At a 30% tax rate and an asset deal: a tax shield of $1.5m p.a.
Pitch tip
'Pro-forma EBIT margin in year 1 after PPA effects is 11.5% (vs. 12.8% for the standalone target) — visualized in a 5-year bridge to the target margin in year 5+'.