What is a Bargain Purchase

A bargain purchase involves assets acquired for less than fair market value. In a bargain purchase business combination, a corporate entity is acquired by another for an amount that is less than the fair market value of its net assets. Current accounting rules for business combinations require the acquirer to record the difference between the fair value of the acquired net assets and the purchase price as a gain on its income statement due to negative goodwill.

Breaking down a Bargain Purchase

In the aftermath of the 2008 market crash, the enormous number of financial companies that were trading at huge discounts to their book value presented an unprecedented opportunity for bargain purchases. Firms that were able to take advantage of these distressed priced companies and assets were able to add to their asset base at relatively little cost.

Examples of a Bargain Purchase

Perhaps the most famous of these bargain purchases during that tumultuous period was Barclay's acquisition of Lehman Brothers (more specifically, its North American investment banking operations) in September 2008, which resulted in delivering approximately GBP 2.26 billion in negative goodwill to Barclays' books. Another deal that emerged from the financial crisis to illustrate a bargain purchase: The takeover of HBOS plc (the holding company of Bank of Scotland plc) by Lloyds TSB in 2009 for far less than the value of net assets produced negative goodwill in the amount of approximately GBP 11 billion that was added to Lloyd's capital base and its net income that year.