Question

Identify the different forms of purchase consideration which may be used by an acquirer and describe potential issues in relation to the valuation of those forms of consideration.

Answer 1

Purchase consideration can be paid by aggregate of the shares and other securities issued and payment made in the form of cash or other assets by transferee company to the shareholders of the transferor company.

There are different methods of paying purchase consideration i.e

1) net asset method: purchase consideration = total assets taken over at agreed price - liabilities assumed at agreed price= net assets

2) net payment method

Purchase consideration= total payment to equity shareholders and preference shareholders of vendor company.

3) intrinsic value method

= Number of equity share of vendor company × intrinsic value of one share of vendor company/ intrinsic value of one share of purchasing company

4) lump sum method in which purchase consideration will be given in the question

In all these form generally one issue occur it is notable that purchase consideration does not include the sum which transferee company will directly pay to the debenture holders or creditors of the transferor company.

Second issue is that sometimes there is difficulty in making adjustments in purchase consideration in light of one or more future events.