Majority of deal value in M&A transaction goes towards intangible assets: Study

A significant proportion of the deal value in a merger and acquisition transaction is allocated towards intangible assets, reflected by the underlying products, brands, intellectual property and customer relationships, says a study.According to an EY study based on annual reports of top 500 listed companies in India by market capitalization from FY2017 to FY2020, 31 per cent of the enterprise value of the acquired companies was allocated to identified intangible assets.An intangible asset is an asset that is not physical in nature.

A significant proportion of the deal value in a merger and acquisition transaction is allocated towards intangible assets, reflected by the underlying products, brands, intellectual property and customer relationships, says a study.

According to an EY study based on annual reports of top 500+ listed companies in India by market capitalization from FY2017 to FY2020, 31 per cent of the enterprise value of the acquired companies was allocated to identified intangible assets.

An intangible asset is an asset that is not physical in nature. Goodwill, brand recognition and intellectual property, such as patents, trademarks, and copyrights, are all intangible assets.

The study further noted that 34 per cent of the enterprise value of the acquired companies was allocated to 'goodwill'. Goodwill is the amount paid in excess of the target company's net value of its assets minus its liabilities.

As per the study, the allocation to goodwill in India is largely in line with the proportion allocated in global deals (like in the US).

In sectors like consumer products, life sciences, information technology (IT), information technology enabled services (ITeS) and retail, majority of the deal value is allocated to intangible assets.

For sectors like real estate and hospitality, and energy, which are capital intensive, more than two-thirds of the enterprise value is allocated to the tangible assets.

Ernst & Young Merchant Banking Services LLP's Valuation, Modelling & Economics Services undertook the study of business combination accounting for transactions that were disclosed in annual reports of top 500+ listed companies in India by market capitalization since implementation of Ind AS till March 31, 2020.

Transactions with enterprise value less than Rs 100 million and with goodwill more than 100 per cent of the enterprise value were ignored. A total of 396 transactions were found where adequate information about purchase price allocation (PPA) was disclosed.

Purchase price allocation is a practice in which an acquirer allocates the purchase price into the assets and liabilities of the target company acquired in the transaction. It is an important step in accounting reporting after the completion of a merger or acquisition.