Mercer Capital's Financial Reporting Blog

Allocation to Goodwill Fell in 2012

Although goodwill remains the largest and most common intangible allocation, the proportion of value allocated to goodwill fell during the past year. Houlihan Lokey recently released its 12th annual Purchase Price Allocation Study, which this year reviewed the intangible asset allocations of 511 transactions during 2012.

In 2012, goodwill accounted for 39% of total purchase consideration, compared to 43% of total consideration in 2011. Houlihan Lokey indicated that no single intangible asset category increased significantly, despite the decline in goodwill. Goodwill accounted for over a third of the purchase consideration in over half of the transactions studied, and 95% of transactions recorded some amount of goodwill. Customer-related intangible assets were the next largest and most common intangible assets after goodwill.

Other important observations from the study include:

  • The number of tradenames recorded as indefinite rather than definite-lived assets increased over the previous year, but still remains below 2010 levels. The number of transactions recording trademarks or tradenames declined to 41% in 2012 from 58% in 2011.
  • Media and entertainment related industries, the technology industry, and the aerospace industry reported the highest percentage of consideration allocated to goodwill. They allocated 64%, 44%, and 41% of total consideration, respectively.
  • The healthcare industry, the technology industry, and Media and entertainment related industries reported the highest percentage of consideration allocated to intangible assets (excluding goodwill). They allocated 40%, 35%, and 34% of total consideration, respectively.
  • The number of qualifying transactions in the analysis increased 11% over the previous year. The median transaction size increased to $66 million from $50 million in 2011.

Correctly allocating intangible value among acquired assets is critical for both near-term amortization figures (and EPS amounts) as well as for longer term evaluation of the acquisition (through goodwill impairment testing). These items will only continue to become more important as the M&A market continues to strengthen.

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