Asset Write-Up

When an acquirer buys a target, it must allocate the purchase price across the target's assets and liabilities at fair value — this is purchase price allocation (PPA). Often a target's book values understate true worth (a building bought decades ago, a valuable brand never on the books). The acquirer writes these assets up to fair value, and any purchase price left over after allocating to identifiable assets becomes goodwill. So write-ups and goodwill are linked: the more you can allocate to identifiable assets via write-ups, the less goodwill you create. This is a core mechanic in any merger model.

The single most important nuance bankers test. In a straight stock deal, write-ups are recorded for book purposes but the tax basis of the assets does NOT step up — so the extra book D&A isn't tax-deductible. This mismatch creates a deferred tax liability (DTL) equal to the write-up times the tax rate. In an asset deal (or a 338(h)(10) election), the tax basis DOES step up, so the incremental D&A is tax-deductible, generating real cash tax savings — a meaningful source of value, especially in an LBO. Buyers prefer stepped-up asset deals for the tax shield; sellers often prefer stock deals to avoid double taxation.

Write-ups raise the asset base, so post-deal depreciation and amortization rise, dragging on reported net income — a key driver of dilution in an accretion/dilution analysis. The extra D&A is non-cash, so it's added back on the cash flow statement. In a non-stepped-up (stock) deal, the DTL unwinds over time as the book/tax difference reverses, a non-cash item in the model. In a stepped-up (asset) deal, the deductible D&A lowers cash taxes, boosting free cash flow — which is exactly why PE sponsors prize asset deals.