Acquisition Adjustment

An acquisition adjustment describes the difference between the price an acquiring company pays to purchase a target company and the net original cost of the target utility company's assets. An acquisition adjustment is a premium paid for acquiring a company for more than its tangible assets or book value.

Also known as "goodwill."

A company may prefer an acquisition adjustment if the brand and other intangible assets such as patents and good customer relations, provide value to the firm.

Many modern businesses derive more value from their intangible assets than their tangible assets carried on their balance sheet. This can distort a business's financial and operational picture. For example, many businesses treat investments in their brand, research and development (R&D) or information technology as expenses, when in fact, they provide long-term value. Hence, they should be accounted for similarly to a traditional fixed asset. For instance, Kite Pharmaceutical, a cutting-edge biotech company, reported hundreds of millions of dollars in losses every year because they expensed their research and development efforts, rather than capitalizing and depreciating them. In the second half of 2017, it was acquired by Gilead Sciences for no less than $12 billion. Not bad for a business showing little income but a lot of value.

The idea behind an acquisition adjustment takes place on a couple of levels. First, and most basic, the acquisition adjustment speaks to the premium an acquirer pays for a target business during a transaction. Second, and on a deeper level, how the acquisition adjustment is treated ultimately affects how assets are capitalized, depreciated and leading to how that, in turn, affects net income and corporate income taxes. Delaying taxes with depreciation tax shields can add up to significant net present value over longer time periods.