Tag Archives: M&A

Before & After the Deal – What Middle Market CFOs & Controllers Need to Know Part 2: After the Deal

M&A transactions are major undertakings that can require a thorough due diligence process. But that’s only part of the story — once the deal closes there are a number of other considerations that CFOs and Controllers must wrestle with. In Part 1 of this two-part webinar series we explored pre-acquisition due diligence. Now, in Part 2 our high-level overview of the M&A process continues with a look at post-acquisition considerations including business combination accounting and disputes. Please join us on December 13, 2016, at 11:00 a.m.

Learning Objectives:

  • Identify key focus areas for due diligence in M&A deals
  • Improve your knowledge of the accounting standards applicable to M&A transactions, including certain alternatives for private companies
  • Explore how the purchase price in an M&A transaction is allocated to the assets acquired and liabilities assumed, including the valuation of intangible assets

Who Should Attend?
CFOs and Controllers

Speakers include Aronson LLC Partner Bill Foote, and Aronson LLC Manager Jimmy Zhou.

Register to attend and recieve CPE Credit. Webcast participants can earn up to 1 CPE credit in the Management Advisory Services field of study.

CPE-related Information
Delivery: Group-Internet Based
Program Level: Basic

What Drives Value in Government Services & Defense M&A?

M&A transaction volume in the government services & defense market in recent periods has trended upward. There were 112 government services & defense acquisitions in 2015, compared to 82 and 79 acquisitions in 2013 and 2014, respectively. There were 31 acquisitions in the space for Q1-2016, which was a significant increase over Q1-2015 activity.[1]

So what are the target company attributes that spark interest from potential buyers and influence valuations the most in these deals? Specific value drivers vary from company to company, but some common themes for government services & defense firms include:

  • Strong, long-term relationships with government customers
  • Services/capabilities that are sought after in higher-priority markets (e.g., cyber security, data analytics, healthcare IT, C4ISR)
  • Significant contract backlog (prime contracts, unrestricted, substantial funding) that yields clear revenue visibility
  • Access to large, prime IDIQ vehicles (e.g., GSA Alliant and OASIS, DIA SITE / E-SITE, VA T4 / T4NG, CMS ESD / SPARC)
  • Specialized workforce with security clearances or certifications in cutting edge COTS solutions
  • Distinguished technology or revenue-producing intellectual property

While this is not an exhaustive list, attributes like the ones cited above tend to impact a firm’s growth prospects and its capacity for sustaining profitable operations. These attributes may also provide an acquirer with opportunities to penetrate new markets and maximize pre-existing customer relationships.

Interestingly, these value drivers may be visible on the acquirer’s balance sheet after the deal closes. For financial reporting purposes, the acquirer must allocate the purchase price among the assets acquired and the liabilities assumed from the target company, at fair value. How the purchase price is allocated can be indicative of a target company’s value drivers. In order to explore this concept, we looked at acquirer business combination disclosures for approximately 30 deals occurring from Q1-2015 through Q1-2016 in the government services & defense market (see table below).

While every transaction is different, we found that on average 28% of the purchase consideration in these acquisitions was allocated to identifiable intangible assets and 67% of the purchase consideration was allocated to goodwill.[2] Most common among the identifiable intangible assets were customer-related assets (i.e., contract backlog and customer relationships), which accounted for as much as 39% of the purchase consideration in the deals analyzed (average 21%).[3] While less common, value was also allocated to technology-related assets in a number of the transactions studied; these assets accounted for as much as 33% of the purchase consideration (average 11%). But what about workforce-related assets, you may be wondering. Accounting standards require the value of the acquired workforce to be subsumed within goodwill.[4]

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It may also be interesting to consider the useful lives assigned to customer relationships and developed technology. In the deals we studied (see table above), customer relationships were to be amortized over periods ranging from 8 to 20 years (average 13). Amortization periods for developed technology ranged from 4 to 15 years (average 8).

A final note with respect to customer-related assets. Middle market government contracting firms should be aware of recent standard setting activity in this area by the Private Company Council (“PCC”) that affects business combination accounting. For more information, click here.

Aronson LLC’s Financial Advisory Services practice assists clients in a variety of industries with numerous M&A-related activities, including pre-acquisition due diligence and post-acquisition purchase price allocation analyses and impairment testing. To learn more click here or contact Bill Foote at 301-231-6299.

[1] Source: Aronson Capital Partners Q1 2016 Market Update. Click here to read in full.

[2] Under business combination accounting, identifiable intangible assets (i.e., those that are recognized apart from goodwill) generally fall into the following broad categories: marketing-related; customer-related; artistic-related; contract-based; technology-based. Goodwill is a residual value, generally representing the excess of the purchase consideration over the aggregate fair values of the identifiable assets acquired net of the liabilities assumed.

[3] In some instances the values of customer relationships and contract backlog were disclosed on a combined basis; in other instances the values of customer relationships and contract backlog were disclosed separately.

[4] The financial statement disclosures don’t reveal how much of the reported goodwill relates to the workforce. The majority of the reported goodwill, however, tends to be attributable to (something along the lines of) “expected synergies from combining the operations” of the acquirer and the target.

Business Combination Accounting Continues to be a Hot Button Area for PCAOB

After the dust settles on an M&A deal, the acquiring entity always has some housekeeping to do in terms of accounting and financial reporting. Business combination accounting in accordance with ASC Topic 805, as well as subsequent accounting in accordance with ASC Topic 350 and ASC Topic 360, continue to be challenging areas for companies and auditors alike.

The Public Company Accounting Oversight Board (PCAOB) recently released a Staff Inspection Brief that previews their observations with respect to audit inspections conducted in 2015. Among the preliminary inspection findings summarized in the PCAOB release, accounting for M&A transactions features prominently.

The PCAOB cited non-financial assets (e.g., assets acquired in business combinations, including goodwill and other intangible assets, and other long-lived assets) as one of the financial reporting areas where audit deficiencies were most frequently observed. The report states that “[t]he audit deficiencies frequently identified during the 2015 inspection cycle related to testing estimates arising from the valuation of assets and liabilities acquired in a business combination and evaluating impairment analyses for goodwill and other long-lived assets.” Examples of audit deficiencies cited by the PCAOB included instances where auditors did not:

  • Sufficiently test controls over the valuation of the purchase price consideration, and acquired assets and liabilities
  • Sufficiently test significant inputs and assumptions used to value certain assets, including projected financial information developed by the issuer

This PCAOB release is an indicator that outside auditors will be placing increasing emphasis on areas where companies utilize complex and/or subjective accounting estimates. As such, companies should strongly consider engaging a valuation specialist to assist with business combination accounting and the related impairment analyses. Aronson LLC’s Financial Advisory Services practice assists clients in a variety of industries with numerous M&A-related activities, including pre-acquisition due diligence and post-acquisition purchase price allocation analyses, and impairment testing. To learn more click here.

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