How do you model the goodwill mechanics of a step acquisition?
the buyer already holds a stake in the target and buys additional shares (e.g. from 25% to 60%). IFRS 3 treatment — three steps:
- Measure the pre-existing stake at fair value as of the closing date: the existing 25% stake is remeasured to current market value → the difference between the prior carrying amount (equity method or available-for-sale) and current fair value is a gain / loss in the P&L.
- The acquired shares (35%) at the purchase price.
- Total consideration = fair value of the pre-existing stake + purchase price of the new shares.
The PPA is based on 100% of fair value, then goodwill is calculated. Consequence for reported earnings: a step acquisition can create massive one-time effects.
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a 25% stake carried under the equity method at $50m. Current fair value $80m. → a $30m revaluation gain in the P&L. Plus the acquisition of 35% for $120m. Total implied 100% value = 80/0.25 = $320m. PPA against 100% net assets of, say, $200m → goodwill of $120m (40% allocated to the existing stake = 'goodwill uplift', 60% allocated to the new shares). Real-world: Vodafone-Mannesmann (20 years ago), and today e.g. Volkswagen raising its stake in Chinese JVs.
'Identify the step-acquisition revaluation gain in EBT and eliminate it from adjusted EBITDA / EBIT — otherwise it overstates the run rate; a credibility issue with investors if it is not shown transparently'.