Welcome, everyone. Come on in. I'm just gonna give it a minute for the queue to clear out, and then we'll start right up.

Okay, well, I'm gonna start because we seem to have a nice steady number here. Good afternoon everyone, early evening. Welcome to our fourth session, Felix, live on full consolidation and NCI I am your host and instructor, Chris Cordone.

I have teaching assistant Yolanda here we are going to spend the next couple of hours looking at this topic of consolidation in NCI, uh, sometimes referred to as M&A accounting, but it's really kind of falls under sort of another kind of category as well, which I think of is just how, how companies invest in other companies.

So I'm gonna approach it from that angle. It's a little, you know, usually I think of it as it fits in a little bit better, kind of toward the valuation material that we're gonna get to in a couple of weeks. But it's also technically an accounting topic, which is why I think it was pushed up to the front. You know, next week we get into modeling and we'll kinda leave, we'll leave this stuff behind and then revisit it again when we do valuation.

So whatever we do today you'll have some time to digest and you'll get to see it kind of in action once we get into the discussion of enterprise value and valuation. So, what I'd like to do, lemme just quickly go over to our, our syllabus here. You know, we've got the Q&A for any questions, chat is available as well. However some people can't see the chat due to their internal restrictions. So if you could put your questions in the q and a, that would be great.

We will get to them one way or another.

I'm gonna go and switch over here to my syllabus.

And looks like last week, you know, we covered here this this section on cashflow statements.

Interestingly, I know I revealed the solution, but it's not showing, I've gotta put that up there.

I did post my notes at the top and the workout that I did in class, my solution here, I thought I revealed the solution as well as this tryout, which is just kind of a practice test, as well as some kind of more, handbook material, which is this analyst and associate guide practice and prepare pack would be even more questions for you to try.

So I will go ahead and make sure that when I add the solution for today, I will also make sure I add the solution for, cashflow statements as well. So, apologies there, but for now, if you could go ahead and download the consolidation workout empty, we'll get to that file momentarily, work through a bunch of problems. Again, this Felix video playlist will be the complete, you know, recording of this content, not from today's session, but rather, you know, as we've, as we've developed it for you know, for online use, kind of more formally done, very, very helpful. If, if you want a complete review soup to nuts, that's where you go for that.

So I'm just gonna pop out my chat here because that went away.

Alright, great. So full consolidation and NCI NCI stands for a non-controlling interest, and I'm gonna make sure we cover that in some portion today.

It's a big topic for two hours, but I'll make sure that we get to some of that because I think NCI is one of those concepts that is very, very misunderstood and often used the wrong way.

So again, we're talking about these three different levels of investment and basically the way it breaks down is like this, okay? So obviously, you know, companies in a very simple form would spend their resources, their cash, their funding probably developing, you know, their own business, right? Their own you know, their own core business, buying assets perhaps you know, building assets, things like things of that nature, hiring people, all the things that go into growing a business. Well, as companies do mature, they often will, will spend their capital, their, their funds on other types of investments, which are kind of outside of that box.

And that, that type of investing is what we're gonna deal with today. Now, the first level of investment has to do with kind of the smallest level, so to speak, the smallest amount.

So first of all, what I'm talking about here by the way, as I'm talking about buying stakes in other companies, right? So this is gonna be level of investment in terms of stakes in other company, well, I use the apostrophe, I kind of don't like the overuse of apostrophes for things that are not possessive, but that's just me being a little str and white on everyone.

Just to make that look normal or less weird, I'll make it other companies.

So we're buying stakes in other companies. So the first level is going to be buying less than 20%.

So we're buying less than 20%. So what that means again, is that we are going kind of out into the marketplace and purchasing a stake in another company that is under 20% of the total equity stake in a company.

So I'll just throw this out there.

Company has a market capitalization of a billion dollars.

We're talking about somebody going out there and buying less than $200 million worth of that company stock. Now, that's a lot of stock, right? And typically we're not talking about like retail level investing here.

You typically don't do this through your Charles Schwab account, through your e-trade account, right? This is, again, companies acquiring these stakes.

Sometimes they're even done through an equity capital markets desk or an equity, an equity trade, a formal equity trade at a broker dealer, right? Because these are still significant levels.

So less than 20% is what we would call either something that's either a available for sale or a held to maturity.

And in, in, in actuality, this could also apply by the way to things like, you know, bonds and things of that nature too.

So companies can have portfolios of investments and those investments can be stocks and bonds.

I'm gonna be focusing primarily on the buying of stock because, because buying bonds is a little bit different, right? You can't take over a company by buying their bonds.

So no matter what level of bonds you buy it, it's kind of always gonna be sort of an available for sale or a held to maturity. So available for sale or held to maturity.

What makes something available for sale? Well, if it's kind of within a timetable of less than a year that you anticipate to sell it or trade it, it would be available for sale.

If it's held to maturity, it means it would be a longer term investment, it would appear in the non-current section. So that is kind of that, so to speak.

I'm not gonna get into the accounting for this. We're not really gonna have you know any problems on this.

It's really just a matter of understanding that that level. So, so typically, you know, when companies, do acquire that sort of a low level of equity stake in a company, not much really happens with it, except we kind of just, you know, sort of watch it. And when we sell it, of course, we'll, what we could utilize or, or, sorry, realize a gain or a loss on it.

And then that of course would, would impact our financials as well.

But as far as kind of the intricacies of how we handle it I'll kinda leave that aside for now because it's not really the focus of today.

Now, why would a company buy that level of investment? Well, a couple of reasons. One, it, it could just be part of a portfolio of securities that this company is, is investing into occupy. Its kind of loose cash. Companies do do that to some extent. They're not speculators typically. Oftentimes what this is, is a company sort of taking an interest in another company.

And that may be a company that they see as a potential perhaps may be supply chain fit or alternate technology fit, or something like that, geographical fit. So that's why they might do that.

And they start small, so they're just kind of dipping their toe in that sort of, uh, bucket. Now, the next level would be between 20 and 49%. Now, when you buy 20 to 49% of a company's outstanding equity ownership, that kind of triggers a whole other set of rules.

And this type of investment is what we call an equity method investment. EML.

And this is, you know, perhaps the kind of, you know, going steady, uh, portion of the relationship between two companies. They've, they kind of maybe dated in the first category and now they're like getting a little bit more serious, or at least one company is getting a little bit more serious about the other and wants to acquire a a little bit more influence.

And that's kind of the word that is used that they exert influence over the target, the target being the company that is bought.

So what does that influence mean? Well, you might have, uh, you know, direct line to management to, to the C-suite.

You might have a board seat or certainly be angling for one, depending on where you are in that 20 to 49, you'll often hear about activist investors, hedge funds and whatnot, buying up stakes, seeking board seats.

I believe there's an activist investor currently looking for a board seat from Disney and has acquired a enough of a stake where he feels that he can get one.

So they're trying to exert influence over how the company is run.

And you know that, again, that can be for different reasons.

So that's a kind of another level of investment.

Call it an equity method investment. And it's still very much kind of seen as an investment stake.

So it has sort of a separate line on the balance sheet, separate account on the balance sheet to showcase the asset. And the asset here is that investment, right? So we make an investment in another company, and we have on our balance sheet in a, in a line that says under the long-term assets equity method investment. Now, it doesn't typically say the name of the company, it'll just say equity investment.

Sometimes it might even be called other assets or other investment.

It can sometimes be sort of buried in there, depends on the size of the company and the size of the investment.

But we're still kind of very much looking at these two companies separately, right? Company A buys a stake in company B, but they still kind of exist separately. Company B is a separate company. So here, there is no control.

And obviously here there's no control either, but that's kind of obvious I think. So what do I mean by control? What I mean by control is that you don't run the business.

You still have influence, but no control influence, but no control, okay? That in and of itself is another topic.

And if you put equity investment or equity method investment into Felix, you can actually get, uh, you know, a, a nice kind of tour of that. If I just do Felix, here, when I go over to equity method investments, if you wanted to learn a little bit more about equity method investments, we'll cover them a tiny bit more in valuation. But if you were, if you were interested about them, you put in equity investments and we would get, um, or associates, they're sometimes called, depends kind of how they're handled. We might find them here. I'll see if I put in associates, there's a bunch of different names for them. Equity method accounting.

So for some reason it came up under that.

And a whole set of videos on how to do equity method accounting would come up.

So I would kinda leave that, you know, sort of to you. Okay, so let's go back into this.

And I just wanna touch up on a little bit more theory here, and then we'll get into some examples.

So, okay, well now you know, it's time for, you know, an actual commitment, right? It's ring time, so to speak.

And one company is now convinced it wants to buy the other company.

So if this level of investment were to be stepped up to anything over 50%, then we would trigger that control feature or that control attribute. And I mean, think about like, you know, starting a business, right? You two people start a business, if one partner takes 50% and the other partner takes 50%, you've got a shared business. But if one partner is 60 and the other's 40, then the 60 partner is going to actually kind of, you know, run the show. Now, that's a simplistic example because there could be other things in the agreement.

However, what I'm saying here is that that north of 50% here is implying that one entity is actually in control.

And by control it means that they control the way the company is run, the board seats, the management, et cetera. So once you get to that level, according to the, both the tax law and the accounting laws, we have a different approach.

And this approach is what we call full consolidation.

So whereas under the previous category, we were able to kind of keep a separate account on the balance sheet that says, Hey, I bought a significant chunk of this company. Here it is.

Once we get above 50%, we now have to fully consolidate.

So effectively what that means is that the net assets, and by net assets, I mean the assets, uh, minus the liabilities.

Or another way to think of it is, you know, all of the assets and all of the liabilities because they automatically kinda work, sort of offset each other by nature of the fact that they're on different sides of the balance sheet. All of the assets and liabilities are consolidated or, or rolled into the acquiring company.

Now that happens if you buy 51% and it happens if you buy 100%. And toward the end of the session, I'll talk a little bit about that complexity of what happens when you don't acquire the whole thing. But for most of this class, we are going to assume that we just kind of buy the whole thing out rolled up into acquiring company.

So now you've got essentially two entire companies smooshed together. It's a full on acquisition, a full on acquisition.

The way we think about it when we, you know, read those headlines in the paper now there's a bunch of, other rules about this as well.

Some of them I'll cover and some of them will quite frankly just sort of be beyond our scope. Feel free to ask them in the chat or Q&A preferably. Yolanda is an M&A former m and a practitioner super will be super helpful in answering those or bringing them to my attention and after class as well via chat or email.

So let's take a a look at the workout here and sort of just sort of see what's what we mean by this.

And then we'll kinda lay some ground rules down for how this works. Ah, okay, so workout one A Inc.

Buys all of the equity of B Inc from the shareholders of B or 35 in an all cash deal.

Rework the balance sheet of a to reflect this investment. Now, what I'm gonna do here is, um, I'm gonna do these problems consistently, uh, kind of my way so to speak, which I think is sort of the way that they're done, you know, more often than not, you know in a bank, in a private equity firm, not I'm from the lev fin side, but certainly, you know, anytime one company buys another company, you're gonna see this kind of approach to, to building out a combined balance sheet.

And so I will make sure that I post again my sort of in-class answers for you.

Because they might not look like the solution file that was built by somebody else. But what I like to do in these, in these problems is, you know, sort of show kind of an adjustments column or like a, you know, um, we would call kind of a, a a financing column.

How do we pay for it and what's the impact of the transaction? And what that's gonna do is it's gonna help us understand what happens when one company buys another company.

So first thing that we have to do here is I'm gonna put in a sort of finance column here.

And that's just going to basically say, how did, how did A buy B, how did A buy B.

And in this case, what we see here is that they paid 35 in cash, right? 35 in cash.

So effectively what that means here is that we're going to use 35 of a's cash to buy this equity out.

And it's being worded that way by the equity from the shareholders of B because we want you to understand is that this is an equity transaction here.

We are buying the stock, we're buying out their ownership, okay? So if we're buying out their ownership, then sort of the, what I would call the deal adjustment here is that we are effectively making the equity of the B go away.

We're making those stakeholders go away, right? So they are kind of getting bought out, right? So A Inc is buying the equity of B for 35 in an all cash deal.

It says rework the balance sheet of A to reflect this investment. So the cash for A is going to, effectively go, up by the 40 that they are getting from B, but they also have to use 35 of it of their own cash to pay for B. So that's going to be, a net effect of zero. So I'll put another column out here that says combined company, okay? This is the combined or consolidated company, okay? So I'm gonna add this across and that's gonna give me my new sort of total of the in in the deal, right? The cash going down. Okay, so what else is happening? Well, again, we're buying out their equity, right? We are buying out their equity. So the equity in the target company is going away. Why is it going away? Because those owners, which which are represented by the equity account here are getting bought out.

So we have to eliminate that amount, right? We have to kind of eliminate that ownership they're being bought out, walk away. Goodbye.

So I'm going to, in my deal adjustment category, I'm going to take away the 30 here, I'm gonna take away the 30.

So now what we can see here is that effectively what we're saying in this transaction is that we are paying 35 for an equity amount that was only worth 30 on the books. It was only worth 30 on the books, right? So let's think about that for a moment, right? Come, kind of come back over to my notes here. We are valuing B's equity, which is the same as their assets minus their liabilities at 35, right? But if we actually go and look at the book value of B and the book value is of course the carrying value, what the accountants have said that this equity account is worth in historical terms, right? We see that that's equal to 30.

Now there's a difference here, right? There's a difference here.

And that difference of five is the fair market value greater than the book value.

And this is what happens every day with acquisitions, which is to say that a company has a book value that is worth x.

Several companies decide they want to compete to buy out those assets, and they bid up, for example, the price of that company, and they end up paying an amount greater than what's actually recorded on the books.

And this particular process, is probably I would say probably occurs in just about every acquisition that's out there.

And it, and it does. So because under accounting, we always have a kind of book value approach to recording assets, liabilities, and equity. We don't adjust our assets, liabilities, and equity for the most part.

There are some situations when we do actually adjust what we call mark to market, but for the most part, what we bought all this stuff at is effectively the recorded value.

And so that 30 here of book value is kind of an old outdated number.

And so the 35 represents somebody's current market approach to that value, and it's, they're therefore called the fair market value.

So this process of finding out these inconsistencies creates this sort of like gap between the fair market value and the book value. Now why do, the accountants kind of let that happen? Well the primary reason is because book value keeping everything on the books at book value is, is really the most conservative thing to do.

Now if you think about it, if the balance sheet changes on a quarterly basis or an annual basis, that would mean that we would have to have all of these kind of other transactions to make it work. I mean, if I just said, Hey, guess what? All the land that our buildings are sitting on is just went way up this year.

Because we're in a hot area, we're in a hot development area.

So if you raise the asset value up, what would you do to the other side of the book? Other side of the balance sheet, right? What would we do with that? So, you know, we'd have to come up with this system constantly of adjusting, you know, the assets and then the equity, and then what happens if all of a sudden our liabilities perhaps go up for some reason, you know, within then what would happen? So accountants basically say, no, we're not gonna do that. We're gonna keep everything at book value, and that therefore is going to create this effect when we acquire other companies.

And that impact of the fair market value being greater than the book value is what is called goodwill.

So goodwill is in effect the, the purchase price of the assets or net assets of a company greater than the book value of the same assets.

Any questions on that? Any questions on that concept? Okay, so I'm gonna just clarify that here by saying the purchase price, which is in effect one buyer's fair market valuation, right? Same thing greater than book value.

And this is also sometimes called the net asset value or net assets.

And that's both on the fair market side and the book value side. Okay? So coming back over to our problem, what this means here is that we have this concept of goodwill now kind of impacting our situation. It's essentially an accountant's nightmare, right? Because the accountants are living in this concept of book value or historical value.

In other words, what the assets, liabilities, and equity went on the books at.

And we are basically saying that, that we're buying them or acquiring them for an amount greater than that. So the accountants, if you wanna just roll these two companies up, what that means is that you've created a funding side just to draw it out here of 35.

That's the funding. But the asset side that we're buying, the net asset side is only worth 30, right? The net assets, which is the same thing as saying the equity assets minus liability equals equity assets minus liability equals equity.

So equity equals net asset value, right? Net assets, this is an accountant's nightmare.

Like, whoa, what do I do with that? I've just told, I've just told these people that once they acquire a stake greater than 50%, they've gotta roll all those assets together.

But from an accounting perspective, it's not gonna work because you're rolling up 30 of assets and you paid 35 for them. My funding is 35, but my resources are only 30 not gonna work.

So the way we solve this problem is through this concept of goodwill, and it's obviously an accountant's kind of invention.

It's basically accounting for or assigning that extra five of value to the balance sheet in this kind of other asset account. So what we're missing here is an asset.

We need more assets.

And so what goodwill is going to be here is a plug of an asset, okay? So Goodwill is going to plug the asset side of the balance sheet.

And what we'll see as we move into kind of some of the more detailed problems is that it will get kind of its own fancy line item.

But for now, what we're going to do is we're just going to actually consolidate this into the long-term assets category here.

So I'm gonna put my goodwill in here. So my adjustment, therefore is going to be five, and that's going to create out of thin air, out of thin air, this, you know, sort of new asset, okay? Now I want to kind of move some of this stuff over so I can finish my problem.

Now I can continue to kind of go down the balance sheet and see what a is getting out of the deal. They're just rolling all of this up together, right? Rolling all of this up together so I can actually even just copy, um, these down. So here, um, just putting my formula here, I've added right across, I've acquired, B'S cash, I've used some cash, I'm left with 105.

I had 200 of assets, I acquired 100 of assets.

And then I also created out of thin air, this goodwill for overpaying, so to speak over the book value. And that combined gives me 305.

Now, if I add these up, I get 410 and I'm just gonna go ahead and create a more proper balance sheet.

I always joke that sometimes fe lets some of the formatting kind of be sorted out later. And I'm gonna sort that out Now for us. Here's my total assets of four 10. Okay? Let's look at the liability side. Now.

Now we actually didn't do anything with the liabilities here. Nothing, nothing, nothing. So all we're gonna do here is just add a cross.

Now I'm, yes, I do have to acquire their liabilities. Absolutely. I bought, if I bought their equity out, if I bought the, the residual stake out, it means that I bought the assets and the offsetting liabilities. So I'm gonna be responsible for those two. So I'm gonna go ahead, I'm gonna add up my current liabilities.

I'm gonna add up my long-term liabilities, and now I'm gonna add across my equity.

And you'll see that the old equity has gone away and left only with the one 20, which establishes that the original company or the acquiring company, I should say, is actually the one that's in charge. Now, the old ownership is gone, and that is going to bring my total to 410, and my total L&E is solved at 410.

So that is kind of a very basic, very simplified example of what a full consolidation transaction is.

One company rolling up the net assets of the company that was acquired and, and creating a combined company as a result. Any questions on this? Okay, so we'll skip over the, um, the next couple of things here.

Let's just do another one for you know, just to kind of expand on this concept of acquisitions and consolidation.

Now here we have workout three.

Milan bought 100% of the equity capital of Pisa for two 40. Now I teach this problem set quite a bit.

You gotta get used to the Italian names.

This whole sheet is in Italian names all Italian towns in Italy.

So you're gonna see that theme and they're just kind of rubbing our nose in it because that's where the owners that got bought out and these deals all went to Italy and we're, we're stuck here running the numbers. Okay? So Milan bought 100% of the equity capital of Pisa for 240 million.

This transaction was funded through 5 million of balance sheet cash, and then they raised an additional 90 million of debt.

So here we're talking about the kind of financing component of the deal, okay? Here we're talking about the financing component of the deal. I'll call this financing the deal.

So typically when we use cash existing or anything that's called new debt or new financing debt or new acquisition debt as it's sometimes called acquisition debt, that type of transaction is what you would call an all cash deal.

So we're gonna kind of get into m and a stuff in several weeks, like real, like M&A stuff, but because we're laying the groundwork for this, I just want to introduce the terminology here.

This is technically kind of what we would call an all cash deal.

And you know, the reason why is because, you know, you're effectively raising cash by going out into the market and, and, you know, issuing bonds or taking out a loan.

So we're still ultimately going to kind of pay, pay the owners with, with cash, okay? So this is what we call an all cash deal. Now, what we've, what we're introducing here is this concept of what we call sources and uses, sources and uses.

And that is one of the I guess kind of like the, you know, control panels or motherboards of doing deals, the sources and uses and the sources of a deal. Interestingly, to me, come second, right? It should have been called the uses and sources, but I guess it just didn't flow off the tongue of the first high flying takeover people on Wall Street, they didn't like the way uses and sources sound, so they just kind of made it sources and uses.

And basically what that means is what did I buy and how did I pay for it? So the uses are what was purchased and the sources are how it was paid for.

And if you can set up a sources and uses table for any deal that you're looking at, you can pretty much solve a lot of the problems that you might, you know, encounter, you know, sort of later in the analysis. And I was just telling Yolanda about helping an analyst on the desk, late last night, who insisted on doing one of these balance sheet consolidations without an accurate sources and uses. And when I kept pointing that out, he was just very adamant that they were, you know, looking beyond that. And at the end of the day, once we did the sources and uses, lo and behold, everything kind of snapped into place. So what did I buy and how did I pay for it? So we have to think about that, when we come into this problem again.

So we're gonna do a sources and uses calculation, and then we're gonna do a goodwill calculation.

And the goodwill calculation is going to essentially be how much was paid for the net assets or the equity minus the book value of the same assets.

And that's gonna gimme goodwill. Now, we're going to refine this as we go.

Because like everything, you know, it gets a little bit more complicated, but those are the two that we kind of need to keep in mind right now when we do this problem. Okay? So let's come back here. Hey, now where are we? Okay? And let's actually do a sources and uses table and let's do a goodwill calculation for Milan and, and Pisa. Okay? So for these sources and uses, the uses of funds are what? Well, it's, it's what we bought here right now. What we bought was 100% of the equity capital of Pisa for 240 million.

So purchase of equity capital of, I'll just call it purchase of Pisa equity.

And that was two 40.

Now, did we buy anything else here? Well, it doesn't say that we did.

Now you might be saying, well, what else could you buy? I mean you can't, you know, go into the gift shop and say, hey I'll take a few sweatshirts on top of that and throw in some hats and, you know, know, no, I mean, essentially, um, you know, that that is it. Now there are situations as you get more complicated where you will perhaps refinance their existing debt as well. And we may get to some of those problems today.

So there are other things that have to get paid for when you buy a company. And then there are also those pesky bankers and lawyers who are just pounding the table for their fees, right? And they gotta get paid too. So we might eventually have some more, you know, stuff in here that we have to come up with. I mean, it's not unlike, and you're probably, you know, at an earlier stage in your career, maybe you haven't bought, you know, any property, but like it's like if you do you buy a house and then you show up to close and it's like $27,000 for this and $9,000 for that, and you're just like, wait a minute.

That wasn't in the house price. I negotiated the house price. Well, they're, they're lawyer fees and mortgage fees and whatnot. So all that stuff could be in there. We're gonna leave that out for right now.

Okay, so uses are the purchase of the Pisa equity.

And now I'm gonna move on down to the sources of how we're going to pay for that. Now, what this says here is that I'm going to use existing cash of 5 million. Now I can't use Pisa's cash, that's theirs. This is coming out of Milan's cash. Now in five seconds, they're gonna be combined, right? But still, I mean, if Milan had zero here, I could not assume that I, I'm using 5 million of cash, right? Milan's gotta have some cash. And they do.

So 5 million of cash is going into the deal and now they're going to issue equity of 90 million.

So in this slide here, I was saying that if there's new debt acquisition debt, that would be considered also cash.

We could also have new equity.

We could actually go out to the market as Milan and say, I need more capital public markets. Can you please fund me? Or I could go to private investors and raise private equity and say, we want to do this deal. Can you fund us? That would still be technically considered in M&A purposes for M&A purposes in all cash deals. So, because you're bringing, what are you giving to the sellers? You're giving them cash, right? What are you giving them? You're giving them cash.

Now why do I have to record the cash, the, the stock, the bonds that I'm because that's gonna change our balance sheet as a company, if we raise new debt, the balance sheet changes as a company, if I raise a new equity stake, that's gonna change our balance sheet.

And so I have to have that here.

So I'm gonna have new equity issuance, just call it equity issuance. And that's gonna be equal to 90.

Now the remainder of this transaction is going to be new debt.

So what I'm gonna do here is I'm just gonna take my two 40 and I'm gonna minus the five and minus the 90. And that's gonna tell me kind of what's left, what's left, what I have to raise.

Now I always like to point out, and it's just because I'm a debt guy, that it usually well at least in, in the world that I lived in it kind of works the other way, which is to say there's usually so much debt you can get and then the rest you have to kind of bring with equity. But that's okay. I'm going, to let this kind of live as it is here.

And we've got, uh, we've got total sources of 240 and total uses of 240. So we are good to go. And again, this is just gonna set us up for doing the balance sheet work.

So now the next thing that I'd like to do is I'd like to do my goodwill calculation.

My goodwill calculation is going to just help me again with all of these kind of plug figures that I'm gonna need to make this work. So my goodwill is equal to, as you recall from my notes, how much did I pay for the existing equity? Well, that's the 240.

So I'm just gonna go up here like a good lazy modeler that I am.

I'll joke next week when we, when we meet again that you know, all good analysts or modelers, so to speak are lazy.

And I mean that in a totally loving and complimentary way, not careless lazy, but lazy in that if you can link to something that's already been done, you do it right? And that includes typing for me. 'cause I'm a bad typer.

My purchase of equity is 240 and that's gonna be, again, how I start this calculation.

And then what I need to do is I need to figure out, okay, this is the fair market value.

This is what the market is telling me their equity is worth.

Well, what's the book value? The book value is equal to the equity on the books of Pisa. Now you can do this two different ways.

We can do this as simply going in here and grabbing this 115, sorry, I got a, grabbing this 115, or if you, if you don't trust me, we can get it by taking the assets minus the liabilities.

So I'll just do this here just so that, we can kind of have this kind of, you know, trust going forward that what I'm saying is, is correct in this problem. This works in this problem, this works fine. Okay? Assets minus liabilities equals the net asset value equals the book equity value. Okay? So what this means is that my goodwill is the difference of 125. Now, right off the bat, just because we're all coming at this from different levels, and I don't get to meet you all and talk and we don't get to kind of know where we're all coming from, but is this a bad thing? Is this a bad thing that we've effectively, you know, overpaid I mean, I'll give it a second in case anybody wants to chime in. You don't, you don't have to not that this isn't the best kind of format for collaborative or interactive, because of the way we're set up here, but if anybody wants to chime in, they can.

Is it a bad thing that we have overpaid here for this? Or, or have we overpaid for this company? Maybe is a better way of putting it have we overpaid for this company? Well, with what information we have right here, Obviously, who knows, right? We could only really, we'll only really know once we run the company and try to extract value from it. And believe it or not, that's what the accountants say and what the regulators say too.

this process of creating goodwill has nothing to do.

It's not somebody wagging a finger at, at you and saying, you overpaid you greedy, you know, take over tycoon, you overpaid for this company. No, it's not that at all. It's acknowledging, you know, a gap in the accounting.

So, uh, there are times when you will overpay and there, there are times when you get a tremendous value from, you know, from overpaying.

But that's not what this is telling us.

We can't possibly know that right now.

So the 125 is our goodwill.

Now what I'm gonna have to do here is sort of move this about, because I wanna do my last week if you were with me, I had my patented trademarked approach to building a cashflow statement that I said was, was failproof fail proof, right? And this is as well, I don't need to go that far over. We're gonna have to kind of lemme see. I need 1, 2, 3, I can go one more over. Okay? So what I'm gonna do here is, again, I'm gonna have a financing column and I'm gonna have a deal column, let's call it. And then I'm gonna have a combo and I will do us all a favor and I will bring our formatting into the 21st century.

And now we have something that looks a little bit more realistic financing deal combo. Okay, well, financing obviously this is going to come from our sources and uses.

Because that's what we laid out here in this, in this table was how we're gonna pay for this.

So what's gonna happen here, and I'm, I'm just gonna go back to a hundred.

I think most people are probably, hopefully maybe on two screens.

Wait a minute, okay, it's as good as I can get it. So we use five of existing cash, so that's gonna be a negative that's gonna be negative five here.

Because cash is going away, right? And then we also have an equity issuance of 90 in new debt of 145.

So I'm gonna go down here, I'm gonna go into the long-term debt category.

You might say, well, could it be short-term debt? I mean in theory from the perspective of this problem, it, it wouldn't matter.

But technically we pay this is an we're buying a company, we're gonna have it for a long time, right? I mean, even if we're, even if we plan to sell it in a few years, it's still considered a long time.

We're gonna want to use long-term financing for that, right? You wouldn't buy a house or a car on a credit card, right? You know, hopefully you wouldn't, although who knows? But you wanna try and match those resources.

So I'm gonna put this financing in the long-term debt section and that's gonna be equal to the 145. Okay? And at the same time, I'm gonna go in here and I'm gonna put my new equity issuance of 90 into the equity section.

So the financing part of this is done. Okay? I've basically just shown how I'm gonna pay for this.

Now I'm going to look at sort of what the deal, sort of implications are. Now, again, what happens here when we buy out existing shareholders is their equity goes away.

So I'm gonna knock out that, I'll just do it that way.

I'm gonna knock out their equity gone.

They are no longer stakeholders in the new company.

They got paid off.

Now what that means here is what I'm showing you is that we paid the financing column for net asset value.

That's at book value of one 15.

So the financing column kind of represents the, the fair market value and the deal, adjustment here of eliminating their equity is the book value. And the, that's what's outta whack.

So we need to go in here and add our goodwill of one 15.

And now we have effectively done all of the adjustments that we need to put into this balance sheet, and we should in fact balance now.

It is, by the way. It is, wait, did I do that? Yeah, I'm sorry. I linked to the, I was like, wait a minute. How is that a coincidence that they're both 115? No, the goodwill is the 125. Sorry. So apologies for that.

So we've added the goodwill to the balance sheet because that's the plug. That's the plug. Okay, so now let's prove that, that this works, right? And if it balances, then we did it, right? If I had left that at 115, we would be off and then I would be, I would be begging to yoland to yo Yolanda to explain to me what I did wrong because I, you know, get what I'm teaching. I get so wrapped up into talking that, I can't see my own screen in front of me. Okay? So let's go across here, add the eight plus six, minus the five. Okay? Eight plus six minus the five.

Now I'm just gonna copy that down using control D because that's, you know, really all I need to do here. I don't, I don't have any other adjustments and it's the same formula, even if I did, right? When I get to Goodwill, I'm taking Milan's existing Goodwill. Now what does that mean? It means Milan has done a previous acquisition, a previous transaction.

So now they're gonna have the ramifications of two of these deals on their books. Their goodwill has gone up to 225.

And then I'm gonna take this 467, uh, total here.

I could take the 778 total and copy it in here. That's just, you know, me saying, you know, I know that this formula worked because it, the balance sheet worked in the historical year.

So I'm just gonna go ahead and copy that over here.

Okay? Same thing down here. I copy across, I copy down.

The only thing that's impacted here is the long-term debt.

I go over and get my total liabilities from my Milan calc. I do the same thing here for my shareholder's equity.

And I get my calc here for total liabilities and equity. And lo and behold, I am in balance.

Any questions on that? What I did off to the right, what I did in the actual balance sheet? Any questions on that? No, I haven't yet talked about what happens to the income statement. And I will, I will cover that, um, toward the end. But typically, we start by focusing on the balance sheet first.

I mean the balance sheet, you know, it really is the, it's kind of the root in a sense, right? Because you can't have a company without a balance sheet.

You can't really have any profits or cash flows without the balance sheet. So that's one of the reasons we focus on the balance sheet.

The second reason is that valuation, and you'll hear me say this again in a couple of weeks.

Valuation is ultimately a balance sheet problem.

How do I value this company? How do I buy out that equity stake? How do I value that equity stake? It's a, it's a balance sheet situation. So we typically start with the balance sheet and then we get into, you know, what that share of the profits, the net income will, will ultimately be. Okay? So let's, um, take a look at another problem here. Let me see here. What do I have? I think this is just another, I have that one's highlighted here that I want to do.

So now we'll just do another one of these just to kind of, again, kind of get it into our into our muscle memory.

Now they've actually given us some space here to go ahead and do the the sources and uses. So, we'll do that quickly here. Now, I'll do my uses first.

What am I buying? I'm buying a hundred percent of the capital of Palermo for 300 million. So I'm gonna purchase Palermo equity and that's gonna be 305 no fees.

Not refinancing any debt here.

So that's not really an issue. So my total uses gonna be equal to 305.

Now sources, how did I buy this? Well, I've got existing cash equal to the five.

We're going to go to the capital markets or go to a private equity source and we're gonna raise 75 million of additional equity, an additional ownership stake in the parent company or the purchasing company. So here we have equity issuance and that's gonna be equal to 75.

And then I've got acquisition debt and that's gonna be equal to whatever's left minus the sum of my cash and my equity. And that tells me that I need 225 and that gives me a balancing sources and uses. And we're good to go. 305. Now, goodwill calculation. Okay, well we've done this. We should be ready to rock and roll here.

The first thing I need to determine is what I paid for these net assets. And that's gonna be equal to the 305. Now the next question is what are those assets worth on the books? What is their historical value? So the historical value, or the book value of equity, i.e. net assets is equal to the 161.2 or I think we're, you know, we're hopefully at this stage in the relationship where you have trusted me, but I'll do it again just in case 654 minus the 492.8 same thing, 161.2 and that's gonna give me a goodwill oh of 143.8. Okay, so let's just go up here and I'm gonna grab these headers.

This isn't the one I'm doing, is it? Of course not five.

There we go.

And we'll put this to the test.

Financing goes down by cash goes down by five because we're using five of existing cash from Napoli, don't forget.

And now we're going to also increase our equity stake by 75 and we're going to increase the long-term debt by 225.

And that's the funding taken care of.

So now what are the deal adjustments? Well, in this situation, again, the first thing, the easiest thing is to get rid of the equity. Now, first of all, I just want to point something out. You'll notice that I put the 75 of the new stock, the new equity issuance in the common stock in the capital account.

I didn't put it in the retained earnings account. Now, typically when we model, we, we, we might just model one equity line. We won't, show all this detail, but sometimes you do the model I was working in last night, which is very much a live deal for a, you know, a real bank.

They were showing the common stock and the retained earnings separately, when you issue new stock, it's not retained earnings, right? That that can only come from net income being kept in the company.

So this 75 has to go in this line. Now as part of our deal adjustments, we need to get rid of palermo's common stock and their retained earnings. So we're gonna get, get that out of there. And then again, we have the balance sheet of problem of what I paid for it and what I'm getting, and there's obviously a gap here. So I'm gonna add the 143.8 of goodwill to that goodwill line, and that's going to hopefully take me home.

So I will go ahead and copy that sum formula down.

I will take my existing sum function here, put a row header in there, same thing here, copy down, grab my sum function here as well.

This is just only reflecting, uh, the, the long-term debt increase. There were no other liability changes.

And now my common stock account will go up by the new issuance down by the elimination of palermo's equity.

Hang on, I have to do that as well. That's not right.

Sorry, let me do that again. There's a total equity line in here, which was not in our last problem, that kind of tripped me up.

So again, if I take that old formula like I've been instructing us to do for, for existing formulas, that'll get us the correct total equity line.

Then when we calculate the total liabilities in equity it pulls in the correct total liabilities and the correct tallied equity here, which is just the sum of these two.

And that gives me the 8 82, which puts me in, in balance with my assets of 1882.

Okay? Any questions on that? Any questions on that? Okay, so I'd like to introduce a few complications at this point.

The complications actually have to do, I'm gonna stick, you know, with with the accounting side of things. There's a whole other tax side of things, which thankfully is not a part of this, but we will come up for anybody that is working in an M&A area or on an on an M&A transaction. And this is what I'm gonna kind of call purchase accounting and essentially what, what purchase accounting is under gap generally accepted accounting principles and IFRS international financial standards of reporting. I think it is financial, I think it's standards, not statements of reporting.

What the actual accounting law is, is that, yeah.

And now I know that I kind of gave you this whole speech about book value and the accountants really want to keep things at book value and they do, and they won't let you as a standalone entity, as a standalone reporting entity, book value must be enforced or retained or the balance sheet. So that's kind of what I said, right? And that's how we got into this whole kind of goodwill thing. Right now, in truth, what the accountants say is that when we actually go through the event of an acquisition, that the acquisition triggers this sort of, um, new world order that they're calling, you know, purchase accounting, which says that when you, when you get purchased by another company, that is actually a very good time to restate the balance sheet. And part of the reason is, is that the accountants realized that this idea of like paying fair market value and getting book value was really kind of weird, right? And Goodwill just sort of sweeps it under the rug.

So the accountants have said actually that they really kind of agree that that fair market value should be used.

So when there is an acquisition, the target, which is the acquired company target's books are written up to fair market value, they're written up to fair market value.

So you know it, if you think about that for a moment, it sounds like, well then we don't need goodwill, right? Because if I bought, if I bought get my Italian locales correct, if I bought Palermo for 305, doesn't that automatically mean that the fair market value of their assets is 305? And that's not actually true.

So the accountants are saying, look, we're not based, we're not saying that whatever, whatever bid you throw into the ring for this target is what these assets are worth, right? What we're saying is, is that you can undertake a process to bring the assets that are on the books up to a fair market value.

And so let's just say that I, you know, I wanted to take over, a company and I went to, I'll go back to Felix.

Look at that. Felix is flashing live. Yolanda, I'm famous.

Look at this Felix is flashing live. I wonder if I click on that, if I'll see me. Okay. If I go to let's just go to Apple. I mean, no one's buying Apple anytime soon, right? But let's just look if I go quickly, just click on the link of their most recent balance sheet, which is from the last quarter. You know, if I said okay look here's their balance sheet. Let's fair market value this.

Well, you know, how, how would I do that? I mean, there's so many things in here that I don't even know how to get a fair market value for, right? There's the, there's inventory, okay, I, I maybe think could figure that out.

Receivables is money I should be getting in, but what about the stuff I can't collect? And then some of these other non-current assets, what are those? And like, I mean it's obviously like this is a mess, right? To go line by line through a balance sheet and try to figure out what things are worth. Now to some extent that is what the accountants are gonna do.

But the reality of that process is separate from the bid that the acquirer is making.

The accountants are just going in there and they're saying, yeah, okay, apple is sitting on a ton of land in Cupertino and anywhere else they have operations, let's value that. What's that worth? Right? Let's value what we think these buildings are. Let's value what we think the inventory. So they are doing this, but it's still not necessarily going to equal the bid because there's a lot of what we, I guess we would call kind of intangible value that, that Apple has as well, right? They have a brand, they have people that they need to retain that are very valuable. I mean, for many of you that are coming from financial firms, I mean, I know from teaching in those firms when I listen to presentations from senior level executives, they'll say that we're a bank. We're not a balance sheet, right? We, the value in this company is in our principles, is in our integrity, it's in our relationships. And it's you, it's the employees that ride the elevators, right? That's the speech that you hear. So where's that on the balance sheet, right? That's gonna be in the purchase price for sure.

If somebody wants to buy a respected, longstanding company, right? But it's not necessarily gonna be in the assets.

So you still might see this gap, GAP, right? Between what you pay for and what you get.

So we write the Targets books up to fair market value, and then we effectively do this calculation again. So that increase in the book value will ultimately impact that goodwill calculation.

So we have to go through this process every time we do a deal of these quote unquote adjustments. So that, so that adjustments column that I introduced is actually going to, you know, gonna actually get some more action now.

So what that means effectively is that the purchase price, which I'm now just gonna refer to as the purchase price. Because it, I also can get a little bit, the semantics of things, the purchase price, which is the valuation, you could call it a fair market as well, but it's just the purchase price minus the net asset value or the assets minus the liability assets minus liabilities, plus or minus any increases or decreases to those assets and liabilities will give you the goodwill.

And all I can say is that this kind of stuff will typically come from somebody else, right? It's gonna come from outside of the financial world or come from a consultant, an accountant, et cetera. So let's take a look at this in practice.

I also wanna say that there, there's really there's two categories of assets, right? We didn't spend, we didn't do the full suite of accounting stuff together, right? We just did. We started with income statement, we went to account, we actually, we ignored the balance sheet. This is the first time we've even, we're even talking about the balance sheet. But there are two kinds of assets, right? You've got tangible assets.

We've got tangible assets. And what are these? Well, these are things like inventory, right? These are things like accounts receivable.

These are things like property, plant equipment, and these are gonna get fair market valued.

And then we've also got things like intangible assets.

And what are these? Well, first and foremost, intangible assets are the copyrights, patents, trademarks, brands that are on a company's books, or not yet, ONAC company's books.

And I bring that up because that's something that we're gonna see in the problems. Copy, copyrights, patents, trademarks, and brands. Now, Goodwill, interestingly, is another kind of intangible assets.

So I have kind of sidestep that issue. We've been adding goodwill to our balance sheet, but obviously Goodwill is not something we can actually touch.

It's purely an accounting fiction, right? Goodwill is an, a kind of intangible asset. And, so that's something that we'll have to kind of keep, kind of keep an eye on as we, as we move through the problems. Okay? Let's go back to the problems and look at this restating of asset value here, okay? Okay. So now workout six says, as part of the negotiations for the Barbados deal, okay, I lied.

We moved into kind of the Caribbean, Southeastern Atlantic here, we're doing a Barbados deal. We have a purchase price, we've got a book equity value book, net asset value, and then we've got some adjustments to that. So we're going to calculate this new goodwill, so to speak, goodwill using the new method. So the purchase price is given it two 50.

And now what I need to do is I need to calculate, I want to, first thing, what I like to do is I wanna start with sort of my existing book value of equity, and then adjust.

So the shareholder's equity on the balance sheet, the net asset value is 160.

So I'm gonna do this kind of off to the side so I can just kind of bring it back in. That's the 160. Now, now the accountants come in and say that's actually a little too old, outdated. We've got some property on the balance sheet, at the deal date, which is worth 40.

I'm sorry, we have, we have property that was on the books that was worth 40.

And then we had some brand, we had a company that has a brand value, but that brand value was not on the books historically.

Book value. So these are both book values, right? Values. Just wanna make sure that the wording doesn't get a little funky here.

Now, why would the brands not be on the books? Well, brand is something that you develop over time, typically. And again, if a company has never been taken over, if you think back to my notes page, a standalone company has never been taken over. It cannot, through the accounting mechanism just create an asset for its brand because the, there's no established book value transaction for it.

So Coca-Cola, if I were to go to, well, I, I can't even really because Coke's balance sheet's too crazy. But if I were to go to Coca-Cola's books and we did an exhaustive search, we would not find anywhere on Coca-Cola's books the value of the Coca-Cola brand. And yet, obviously intuitively we know that Coke's value should somebody want to acquire that is gonna be driven by Coke's brand, right? So the acquisition would be the time for us to value Coke the brand. It's not on there right now. And that's what's happening here.

There's no brand. So as we go through this process, we discover that the market value of this Barbados company is actually, the market value of its property is actually zero.

I don't know what happened in Barbados to make the property value go down.

I would probably buy it and develop it and move there.

If you're telling me it's gone down, maybe, maybe it just needs me to go down there and do something with it.

But the reality is, is that that property is worth less than it is on the books.

So we're gonna have to adjust.

The fair value of property is a, negative sporty adjustment.

Wait, did I do that right? No I'm sorry.

My rows are off. The property has gone up, right? Yolanda, it has gone up to 55. The fair value, the property has gone up from 40 to 55. Thankfully it's gone up. Because I was gonna say something's wrong if some, if people think property on Barbados is going down, no way up by, By 15, right? Yeah. What goes up, we went up by 15. So somebody came in and said, Hey look, the property that you bought, invested and built your plan on a lot of demand for this. It's gone up.

So we have to raise the book value, so to speak, in raising the book value to fair value.

It's going to be 55 minus to 40 to get that increase. I don't want to just take the 55 'cause I'm double counting the original value.

I want the increase here, and now I need the fair value of the brands.

And that's a little bit easier because that was a zero to begin with.

So that's gonna be the 20 minus the zero.

And now what that's saying effectively is that my fair value of the net asset value is 195.

Fair value of book value. It sounds a little odd, but just trying to be as clear as I can here, fair value of book value or net assets is 195, right? Some of those.

And so now my goodwill in this new world that we're in is not just the 250 minus the 160 which we had been doing.

It's 250 minus the 195.

And that lowers the goodwill amount.

And again, it's not that it's, you know, good or bad or whatnot, that there are some other issues with this as you get into more advanced levels.

But I mean, effectively, you know, you wanna make the case to the investors that you know, that you're obviously not that you have an just, you know, massively overpaid.

So by lowering that goodwill amount, you know, it is kinda one step along that, along that path. Now, we do have a question here, right? is fair value just the difference between fair market value and book value? So effectively yes it is for right now. Now there's one more, there is one more kind of adjustment that we're gonna have to make to this. But, but yes, that is where we are with this Goodwill Equity purchase price minus fair market value of the assets.

So let me go back into the problem set and see what the next, next one just kind of goes. Okay, now workout eight is gonna add that, that next wrinkle.

So to my, to my question it just came up in the Q&A There's one more wrinkle that we have to kind of put in here, and then I'm gonna switch over at this point to NCI.

And then I'll try and wrap quickly with just a quick word about the income statement as well, which is not nearly as as complicated.

So the last kinda wrinkle about Goodwill, if I were to just kind of take, where we are with Goodwill

is from an accounting perspective, if a company that we're acquiring as existing Goodwill, we need to adjust this calculation for that because in theory, you, you can't, you can't acquire that goodwill in theory.

Now, the reality is that the purchase price, whatever you are, you are paying for these assets is gonna reflect, you know, obviously some kind of fair value of the, of the entire company.

So if that Goodwill is still on a company's books, that means the accountants have deemed that goodwill to still have value. So what, what do I mean by this? Well, what happens to Goodwill is, as I mentioned to you, it is an intangible asset and it, it just kind of sits as this blob on the balance sheet and it's tested each year for value.

So there's going to be kind of a crew that comes in looking over everyone's shoulder and says, Hey, we're going to check that number and see if in fact it's still worth anything.

Meaning did you overpay for this company or did you not? And if we think that, that there's not as much value in this company as you thought when you established your purchase price, we are going to,

demand that you eliminate or write down this goodwill.

If the assets purchased are deemed to have less value than originally thought the goodwill is devalued or impaired.

So we actually have to write off the goodwill and take a loss on the income statement.

Now, we looked at a few of these when we did EBITDA a few weeks ago where we saw a goodwill impairment. If I go over to, if I go over to,

Lululemon had on their income statement, Maybe it's on the quarterly one. Wait a minute, they have one. They do, am I missing a gain on assets? Maybe it's on the quarterly one.

Which one did I look at the, yeah, I'm sorry. It's on the annual one, not the quarterly one. So last year, not in the first two quarters of this year, but last year, Lululemon had to write down a, a huge chunk of their goodwill. They bought a company, it might've been the, the shoe company. I'm not, I'm not sure.

And after buying it, paying a lot of money for it they realized that it wasn't worth what, it wasn't bringing in the revenues, profits, or cash flows that they thought.

And the accountant said, you need to get, get this off of the books.

Why do you need to get it off the books? Because the accountants say that assets can't remain on the books if they no longer have future value.

So if this company did not turn out to be what you thought it was, then it's gotta go. And, and that's what's happened here.

So when you buy a company, if it's got existing goodwill, that means that it has been tested recently, mo most likely, and it does hold value and you are most likely paying for that value in your purchase price.

But what the accountants say is that you must adjust for that goodwill in the goodwill calculation.

So when we come back up to this concept of goodwill, we also have to remove any existing goodwill from that fair market value calculation. So, uh, I'll do another separate call this Goodwill part two, do it right here actually. So that's gonna be the purchase price, less the fair market value of the net assets.

And that's obviously the adjusted one that we just did, right? And we also have to back out the existing goodwill, and then that gets us to our Goodwill calc.

So sometimes this, this process of looking at a company's book value minus goodwill Is called tangible net worth or tangible equity.

And it's just, again, allowing for the fact that we can't technically purchase this accounting adjustment. Okay? So let's go to the example and see exactly how it's done.

So come over to workouts here and what I see here, let me just see if there's, what's in 10, 11. Lemme see what's in 11.

Might be a better one to do. A hundred percent, 1950. Did they have, okay, so workout 11, excuse me, should have muted for that.

11 is a little bit more comprehensive.

So I wanna do this because it'll just be a nice way to kind of wrap up this with a more detailed problem. And then I can close with the NCI stuff. So Parma PLC bought a hundred percent of Bergamo for 1950.

Par PLC also intends to pay down the debt of Bergamo as part of the deal.

The transaction was funded by balance sheet cash, new debt of 250, and then the remainder with equity.

So a little more realistic from my perspective.

They also found that the value of Bergamo PP&E was 1650 in the fair market and that the intangibles were worth 450.

So what we're gonna do is we're gonna create all of those tables again that we did. And then we'll see what happens with the numbers.

So my uses of cash here are going to be the purchase of Bergamos equity and that's gonna be equal to 1950.

Now my sources, oh, hang on. In addition to this, we also have to pay down their creditors.

So this is more money that we need to kind of bring to the table to pay down more stakeholders. So it, that's another use of cash and that's going to be refinance existing debt.

So that's gonna be equal to whatever debt they have on the balance sheet. Let's take a look.

Bergamo has short-term debt of 65.5 and long-term debt of 1092.

So all of that is going to effectively go away, and that's just more cash we need to bring to the table.

Now does that make the deal more expensive? No it shouldn't.

In theory it doesn't make the deal more expensive because the value of the equity here is not impacted, you know, by that we'll talk about this concept more when we do private equity and levered analysis, but for right now, just kind of bear with me.

So that gives me a total uses of cash of 3,107.5.

Now, sources just call this, okay, sources, I think we're gonna use cash of 10, debt of 250, And then equity is the rest.

And that's just gonna be the difference here. So that's a lot of equity that we're bringing to this deal.

Total sources match our uses. Okay, lemme make sure I got all this right? Yep. Okay, so now what we need to do is our goodwill calculation.

So we know what we paid for the equity.

So now let's look at the book value of the equity and that is going to be equal to the common stock plus the retained earnings or just the 628.7. I could do, do that either way.

And I also have to adjust for that existing goodwill of 300.

So I can do that all in one calculation or I can do it separately.

I think what I'll do is I'll do it separately just so that everyone can kind of see all these things rolling up less existing bergamo goodwill.

It's okay that karma's got it. Pharma's gonna get more, but I wanna get rid of the existing goodwill and that's gonna be this 300.

And now I'm gonna make an adjustment here for brands and I'm gonna make an adjustment here for the asset writeup.

So the pp and e, which is 1173.9 on the books, has been deemed to have an actual value probably because of the land of 1650.

So I'm going to add what we call a PP&E step up, and that's the technical term for it.

So I'm just gonna throw that at you so that we all sound like we're all Wall Street people here step ups and this sound like you really, you know, hit the pub later and you, everyone thinks you really know what you're talking about. You know, step up.

And that's gonna be equal to the 1650 minus the 1173.9, just the increase that we want here.

Because the rest of it's already in that book value number, right? And then we're gonna add the brand step up and that's gonna be equal to the existing brand, which is the 170.3.

And what we're saying is the new value, which is 450, so I'm gonna have to do 450 minus that 170.3 goodwill will always be listed separately from these kinds of intangible assets.

Just so you know that they'll never show goodwill as lumped in with copyrights, trademarks, and patents. Okay? So that gives me kind of a, a fair market value of the book value of assets and that equals the sum of these.

And now my goodwill is equal to the 1950 minus the 1,084.4.

Everybody okay with that? Okay.

Now let's kind of get this into the books here. We'll do, let go up and grab my titles from above financing deal and combo.

Scoot on down as quickly as I can. Bang.

Okay, so we'll just go and plug this stuff in and we should be good to go.

My financing, I'm going to eliminate 10 of cash.

I'm just gonna do the financing column first.

Now I am gonna refinance their debt. Now this is one you typically you could put this in the financing column.

You could also put it in the deal column. I'm going to, so I can keep things sort sort of separate. I'm just gonna put our financing, how we paid for the transaction in the financing column.

So that's gonna be equal to for the long-term debt.

This 250. And then for the common stock or equity, that's gonna be equal to the 2,847.5. Now, in terms of the deal adjustments, what's gonna happen here? Well, we've got a lot now, okay? Because we've got to do all these roll-ups from before, so nothing happened to the working capital, but the pp and e actually got stepped up by this 476.1. So that's gotta get in there.

Our intangibles got stepped up by 279.7.

So that's gotta go in there to the NewCo.

The existing goodwill went kaki.

So that's gotta get knocked out, right? We can't carry that over.

Now at the same time, we're adding new goodwill.

So that's gotta go in the same column. I mean, we can't all have our own column.

It's kinda like what your parents said to you growing up. You can't have your, we all can't have our own rooms, right? Or maybe you had your own rooms, but that's kind of what's happening here. We've gotta put the goodwill in this same cell. So that's where these models, when you're auditing them, you've got to really kind of be careful here. So you're gonna add the 8 65 0.6 here. And so my net increase in goodwill will be 565.6.

Okay? Short, short-term debt going away because I'm refinancing it, nothing's happening to the working capital.

Long-term debt is going away because I'm refinancing that as well.

Long-term liabilities, nothing's happening. Common stock, I'm getting rid of the old common stock and old retain retained earnings, meaning the, the target I should say.

And I should again be ready to go.

So I'm gonna go across and copy down, go up, get that go across, copy down.

Got my liabilities. Nope, did it again with my equity again. So now I've got my equity in here.

I'm gonna do the increase, do the total of my two equity accounts.

And now I'm gonna copy over my total liabilities and equity.

And this is completely in balance and looking good.

Now I realize I'm working fast, probably faster than most of you can work.

And that's just because two hours is like, to get all this stuff in is super, super tight and I've just, I've gotta do that. But I will post this.

There is vid, there are videos and I will put my answers and the existing answers up there for you. I would like to spend the last, you know, eight minutes just talking about what this concept of NCI is, because what we've seen here, we're not gonna do a problem with it because that's a little bit nuts in the time that we have. But I do wanna talk to you about what this means.

So let me just quickly ask 'cause I don't like to be a complete you know, does anybody have any questions about what I just did, followed along at least and didn't get tripped up by anything? Okay, so the next thing I wanna talk about then is this NCI.

and what the NCI is is in all of these examples, we've purchased a hundred percent of the, of the target company. But if you recall back to my first slide, what I said was that these rules apply to any purchase greater than 50%. Well, what happens if you don't buy a hundred percent? Well, if you don't buy a hundred percent, then we have this kind of problem because,

what happens is that we still have what we call full consolidation nation.

However, there's now a gap between the full addition of full rolling up of all the assets and liabilities and the fact that we didn't buy all them to start with.

So NCI occurs when we do not purchase 100% of the target, but we do have a controlling stake.

So effectively 100% of assets and liabilities are rolled up into the parent, but we did not purchase or pay for all of them. So think about that.

Think about what's happening here is you've just, you've got these two companies, right? You've got company A and you've got company B, company B, I'm just making it a little bit smaller.

Company B's a bit smaller, but still the same kind of thing.

And company A buys, let's say 90%.

So what that means is that all of these assets and liabilities have to get added, have to get added here.

So A is going to reflect a kind of new, sort of bigger version of itself.

Just want this thing to go away, a new bigger version of itself that has all of the assets of B. However, when we get to how A paid for B, there's a little bit of a gap down here.

There's a bit of a gap because A has rolled up all the assets of B includes B and includes B, but it it never bought them, it never funded those.

So what the NCI represents is our need to take this little tiny bit of funding and assign it to this stake that we call an NCI.

And what that stake represents is another shareholder outside of our company, outside of our company.

So in the end, if you look at, you know, a true kind of corporate picture, you've got company A sitting up top and company A has bought a bunch of companies, it's bought B, it's bought C, and it's bought D it owns a hundred percent of C and D and those companies are all rolled up.

It's only got 90% of B, but this company is all rolled up too.

So who owns that 10%? Somebody outside of company A owns that 10%.

These shareholders are outside of the company.

So I'm gonna leave you with this one thing before we go.

What does this not mean? Well, if I own 10% of Apple stock, am I a non-controlling interest in Apple? No, I'm just a a, you know, share a minor shareholder is what I am. I'm not, I don't represent funding from outside the company.

Now if Apple purchased my company, but, but I retained a 10% stake, then Apple would own 90% of me show all of my assets.

Ha ha ha joke.

And then I would then represent a 10% ownership stake outside of Apple. Totally different, totally different stockholder, different stock, different group of investors. So, that's the gist of the NCI.

We're gonna come back to it again when we do valuation.

So no need to worry about it too much. There are a couple of problems with it, but it does get a little funky with the math.

So I wouldn't worry too much about it. I will reveal all of that and, um, and then I'll make make sure, you know, when we do valuation and we come back to this concept that, you know, if you had any kind of lingering or hangover questions feel free to ask them then, or please feel free to, you know, shoot them you know, shoot them to me, in advance, via the chat function or, or via email as some of you have.

I will leave it there.

I just wanna say thank you again for another good session.

Seems like everyone's following along or just being very polite and not telling me that they're not. Thank you Yolanda, again as well for her help.

And I look forward to our next session next week, which is gonna be on modeling.

So it'll be a lot of fun for those of you that have, have wanted to get into that. We'll get into that next week.

All right, well, cheerio, have a good evening and see you back here on Felix live next Wednesday.

Yeah, thanks everyone.