The Daily Technical #121: If the share price of a company increases by 10%, what is the balance sheet impact?

Good morning. Welcome to the 121st edition of The Daily Technical.

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OVERVIEW OF YESTERDAY’S QUESTION
What are the three different types of intercompany investments?

1. Investments in Securities: The investment in securities method is used when a company invests in another company's equity, but the ownership percentage is less than 20%.

Due to their insignificant influence, these investments are treated as minor, passive financial investments.

2. Equity Investments Method: When a company owns between 20-50% of another company, this is considered a significant level of influence.

Thus, proper accounting treatment would be the equity method.

Under the equity method, an investment is initially measured at the acquisition price and recorded as an “Investment in Affiliate” (or “Investment in Associate”) on the assets side.

Although a noncontrolling stake, this type of ownership is considered influential enough to affect the target's decisions.

3. Consolidation Method: The consolidation method is used when the parent company has majority control over 50% ownership.

Instead of creating an individual investment asset, the target company’s balance sheet is consolidated with the acquirer.

To reflect that the acquirer owns less than 100% of the consolidated assets and liabilities, a new equity line titled “Non-Controlling Interests” (NCI) is created, which captures the value of equity in the consolidated business held by non-controlling (minority) interests (other third parties).

Common Mistakes

1. Mixing up the percentage ownership ranges corresponding to each investment type. Always remember: Securities for ownership less than 20%, Equity Method for 20-50% and Consolidation for over 50% ownership.

2. Forget to account for non-controlling interests when consolidating financial statements. Always include a separate equity line for non-controlling interests to reflect partial ownership by other parties accurately.

TL;DR

• Investments in Securities (<20% ownership): Minor, passive investments; no significant influence.

• Equity Method (20-50% ownership): Significant influence; recorded as 'Investment in Affiliate' or 'Associate.'

• Consolidation Method (>50% ownership): Majority control; merge balance sheets; reflect minority stakes as 'Non-Controlling Interests.'

DEAL TALK
Hyatt acquires Playa Hotels & Resorts for $2.6B

Key Highlights

• Transaction Value: $2.6 billion (including $900M in debt)

• Per Share Price: $13.50 (40.5% premium)

• Valuation Multiple: 9.2x EV/EBITDA (2024E)

• Target Assets: 24 luxury all-inclusive resorts across Mexico, Jamaica, and Dominican Republic

Check it out here

TODAY’S QUESTION
If the share price of a company increases by 10%, what is the balance sheet impact?

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