Equity Investments, Part 3- Increasing Your Stake in a Company
Mergers & Inquisitions / BIWS
2016-05-27
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This tutorial series is all about equity investments (AKA minority stakes AKA associate companies) -- cases where one company owns between 20% and 50% of another company.
By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers"
To reflect this, we create a line item called "Equity Investments" (AKA Associate Companies
AKA Investments in Equity Interests) on the Assets side of the Balance Sheet.
In Parts 1 and 2 of this series, we walked you through what happens when the parent company -- Liberty Media in this case -- buys a 27% stake in another company (Charter Communications) and then reflects Net Income and Dividends from that company.
In Part 3, you'll see what happens when Liberty Media increases its ownership stake in Charter and pays for it with a combination of cash and debt -- and how that impacts the 3 financial statements.
What Do You Do to Reflect This?
Transaction Adjustments on Balance Sheet - If we've BOUGHT an additional stake, we must reflect the cash, debt, and stock used AND the increase in the Equity Investments line item.
But watch out for limitations! Here, we can't acquire more than 35% for a few years, and can't ever acquire more than 40%.
And watch out for the cash the company has available, plus the amount of debt they can really take on.
Income Statement and Cash Flow Statement -- Change the % ownership for Net Income and Dividends in all future periods... and that's about it!
May need to adjust ending cash balance on the CFS as well.
Arguably, you should change the interest expense to reflect additional debt, but we're just ignoring that here in the interest of simplicity.
Process Outline -- Increasing Your Minority Stake in Another Company
Step 1: Make the assumptions at the top -- purchase price, new ownership percentage, cash and debt used.
Step 2: Set up the financial statements to support "Transaction Adjustments" area -- already done here.
Step 3: On the Balance Sheet, copy and paste Transaction Adjustments from initial stake acquisition...
Step 4: But change them around to reflect the numbers and assumptions for THIS deal.
Step 5: Re-link the post-transaction columns on the Balance Sheet... and be careful!
Step 6: Fix the ending cash balance at the bottom of the CFS for this first post-transaction year.
Step 7: Return to the Income Statement and Cash Flow Statement and change the ownership percentages there.
Step 8: Does everything work? Balance Sheet still balanced? Correct percentages? Cash balances? Equity Investments?
What Next?
Next up: in Part 4, we'll walk through what happens when Liberty Media sells its minority stake in Charter to someone else, including what happens when there's a gain or loss on the sale.
http://www.mergersandinquisitions.com/
By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers"
To reflect this, we create a line item called "Equity Investments" (AKA Associate Companies
AKA Investments in Equity Interests) on the Assets side of the Balance Sheet.
In Parts 1 and 2 of this series, we walked you through what happens when the parent company -- Liberty Media in this case -- buys a 27% stake in another company (Charter Communications) and then reflects Net Income and Dividends from that company.
In Part 3, you'll see what happens when Liberty Media increases its ownership stake in Charter and pays for it with a combination of cash and debt -- and how that impacts the 3 financial statements.
What Do You Do to Reflect This?
Transaction Adjustments on Balance Sheet - If we've BOUGHT an additional stake, we must reflect the cash, debt, and stock used AND the increase in the Equity Investments line item.
But watch out for limitations! Here, we can't acquire more than 35% for a few years, and can't ever acquire more than 40%.
And watch out for the cash the company has available, plus the amount of debt they can really take on.
Income Statement and Cash Flow Statement -- Change the % ownership for Net Income and Dividends in all future periods... and that's about it!
May need to adjust ending cash balance on the CFS as well.
Arguably, you should change the interest expense to reflect additional debt, but we're just ignoring that here in the interest of simplicity.
Process Outline -- Increasing Your Minority Stake in Another Company
Step 1: Make the assumptions at the top -- purchase price, new ownership percentage, cash and debt used.
Step 2: Set up the financial statements to support "Transaction Adjustments" area -- already done here.
Step 3: On the Balance Sheet, copy and paste Transaction Adjustments from initial stake acquisition...
Step 4: But change them around to reflect the numbers and assumptions for THIS deal.
Step 5: Re-link the post-transaction columns on the Balance Sheet... and be careful!
Step 6: Fix the ending cash balance at the bottom of the CFS for this first post-transaction year.
Step 7: Return to the Income Statement and Cash Flow Statement and change the ownership percentages there.
Step 8: Does everything work? Balance Sheet still balanced? Correct percentages? Cash balances? Equity Investments?
What Next?
Next up: in Part 4, we'll walk through what happens when Liberty Media sells its minority stake in Charter to someone else, including what happens when there's a gain or loss on the sale.
http://www.mergersandinquisitions.com/
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