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FINC3013 - M&A FINAL > 5) SYNERGIES & DEAL VALUATION > Flashcards

5) SYNERGIES & DEAL VALUATION Flashcards

1
Q

Income statement: EBITDA

A

= Total revenues – COGS – Selling, general & admin expenses

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2
Q

Income statement: EBIT

A

= EBITDA – Depreciation

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3
Q

Income statement: EBT

A

= EBIT – interest (interest expense + interest income)

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4
Q

Income statement: Net Income

A

= EBT – taxes

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5
Q

FCFE

A

= NPAT + Depreciation – CAPEX – Increase in Working Capital + Increase in Debt

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6
Q

FCFF

A

= FCFEE + Interest tax shield – increase in net debt

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7
Q

Balance sheet: Net Working Capital =

A

(Current Assets – Cash and marketable Securities) - (Current liabilities – current portion of interest-bearing liabilities)

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8
Q

Balance sheet: dif between assets and liabilities on balance sheet =

A

value of the equity belonging to the firm owners

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9
Q

Balance sheet: Total current assets =

A

Cash + acc receivable + inventories + deferred income taxes

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10
Q

Balance sheet: Net PPE

A

= PPE - accumulated depreciation

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11
Q

Balance sheet: Total Assets

A

= Total current assets + Net PPE + other assets

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12
Q

Balance sheet: Total current liabilities

A

= acc payable + accrued expenses + short term debt

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13
Q

Balance sheet: total liabilities =

A

total current liabilities + long term debt + other long term liabilities

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14
Q

Balance sheet: Total liabilities and equity

A

= common stock + retained earnings

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15
Q

CF statement: Net cash from operating activities

A

= net income + depreciation + change in inventory, accounts receivable, accounts payable, accruals

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16
Q

CF statement: Investing activities

A

= investment in PPE

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17
Q

CF statement: net cash from financing activities

A

= change in short term + long-term debt + change in common stock + common dividends

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18
Q

CF statement: End Cash

A

= net cash from operating activities + net cash from investing activities + net cash from financing activities + start cash

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19
Q

Why do we need to calculate the implied tax rate?

A

to determine the interest tax shield (ie, proportion of EBT paid as Tax)

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20
Q

Implied tax rate =

A

taxes/(EBIT- interest expenses) as a %

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21
Q

Debt to capital ratio

A

= total debt / [total debt + (shares outstanding x share price)]

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22
Q

Interest tax shield

A

= interest expense*(1-implied tax rate)

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23
Q

what can you use the debt to capital ratio for

A

to estimate the next year’s increase in net debt:

debt: capital ratio (estimate x (capex(estimate from growth rate) - depreciation(estimate from growth rate))

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24
Q

Synergies

A

value created through inorganic growth that a company could not otherwise achieve

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25
Q

How do synergies arise?

A

combination of multiple firms’ resources and capabilities

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26
Q

In strategic MandA when does the deal go ahead?

A

expected synergy gains exceed the costs and risks of undertaking M&A

(expected synergy gains > costs & risks of M&A)

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27
Q

Whether a synergy is specific and measurable is linked to likelihood

A

of its post-merger implementation.

28
Q

Horizontal mergers

A

MandA btw companies producing the same/similar products/services

29
Q

Why are horizontal mergers common in mature and declining industries?

A

i. Low overall growth and excess capacity

ii. Tough competition, price pressures

30
Q

What does empirical evidence for horizontal mergers show?

A

benefits are short lived and difficult to sustain

31
Q

For horizontal mergers, by merging these companies increase their relative market share which has benefits to them in 4 ways

A

1) increased market power,
2) bargaining power over
3) suppliers and customers,
4) strategically crowding out competitors

32
Q

Horizontal mergers achieve cost savings from

A

utilisation and scale efficiencies: the related comapnies can reduce back-office costs and other direct operational fees (listing fees) + optimise capaacity usage and network efficiency

33
Q

Horizontal mergers –> cost savings net effect

A

company can produce more or the same product/service at a lower cost per unit, ie scale economies.
May also be synergies through scope economies, learning economies, etc.

34
Q

Synergies in place

A

synergies considered ‘realisable’ through the combination of

EXISTING resources and capabilities of the merging entities.

35
Q

Whilst there’s still risk attached to the achievement of synergies in place the resulting CFs may be

A

estimated and reasonably expected to be implemented upon successful closure of the bid.

36
Q

Real option synergies

A

depend on another outcome, or trigger, to occur.

37
Q

Types of real option synergies

A

option to grow, exit, defer or alter some form of operation in response to another factor.

38
Q

the optionality for real option synergies can be viewed as

A

flexibility to the manager and thus more valuable than a synergy in place (no flexibility)

39
Q

how to value option synergies to capture full value:

A 
option framework (such as binomial tree or
Black-Scholes model)
40
Q

Synergies in place can be classified as

A

OPERATIONAL SYNERGIES

1) revenue enhancement
2) cost savings
3) asset sales

  • tax reductions

FINANCIAL SYNERGIES

41
Q

Why is it beneficial to classify synergies?

A

Guides analyst in determining how the
acquisition meets the strategic objectives of the acquiring firm.

Also sets the framework for synergy valuation as the risk varies across different synergies

42
Q

Riskiness of operational synergies:

A

As a rule of thumb, asset sales are generally considered the least risky (near risk-free),

then cost savings and

revenue enhancement being the most risky synergies.

43
Q

How do analysts typically measure the necessary adjustments for control and
liquidity?

A

Usually use comparable transactions approach to measure the cost of control and liquidity

44
Q

Interpretation of results from this form of analysis (comparable transactions approach to measure necessary adjustments for control and liquidity) must be considered in the context of

A

the differences between the firms in the comparable transactions set and the firm under analysis.

45
Q

consolidation mergers

A

subcategory of horizontal mergers take place between firms in highly fragmented industries with a large number of small firms

46
Q

Vertical mergers

A

MandA between companies involved in the production of the same product at successive stages of the value chain

47
Q

Vertical mergers and their synergies

A

Vertical merger to create value should also lead to revenue enhancement and new growth opportunities

48
Q

Economic rationale for vertical mergers rests on

A

comparative efficiency of vertical integration in terms of technical and coordination efficiency

49
Q

Industry blurring merger

A

combines firms operating at different stages of different vertical chains (ie banks and insurance, media and internet)

50
Q

3 advantages of using trading multiples to find intrinsic value

A

1) simple, widely used
2) based on public market prices
3) provides a ‘rel val’

51
Q

4 disadvantages of using trading multiples to find intrinsic value

A

1) peer firm identification is a challenge
2) earnings subject to manipulation
3) market may be wrong
4) not an ‘absolute’ valuation

52
Q

2 advantages of using transaction multiples

A

1) captures control premium

2) may show trends, help determine bid strategy

53
Q

control premium

A

amount that a buyer is sometimes willing to pay over the current market price of a publicly traded company in order to acquire a controlling share in that company.

54
Q

3 disadvantages of using transaction multiples

A

1) transactions are rarely direct comparables
2) premia fluctuate over time
3) harder to identify suitable sample

55
Q

6 advantages of using the DCF

A

1) Theoretically sound,
2) rigorous, analytical,
3) cash focused,
4) forward-looking,
5) multiperiod, captures time value of money
6) can value segments or synergies separately

56
Q

4 disadvantages of DCF

A

1) time consuming
2) can be fudged
3) highly sensitive to inputs
4) Terminal value captures significant part of value

57
Q

Implementation costs for synergies need to be accounted for on

A

an after tax basis

58
Q

Vsynergies in plac

A

= sum of (After-tax synergies)/(1+RADR^t)

59
Q

RADR: no material risk

A

use risk-free rate (ie, certain asset sales like inventory reductions)

60
Q

RADR: as risky as EBIT

A

Cost of debt (lower risk cost reductions)

61
Q

RADR: as risky as enterprise FCF

A

WACC (medium risk cost reductions, lower risk revenue enhancements)

62
Q

RADR: as risky as equity FCF

A

Cost of equity (higher risk cost reductions, med risk rev enhancements)

63
Q

RADR: More risky than equity FCF)

A

Hurdle rate (minimum rate of return required on a project or investment)

64
Q

Liquidity

A

the ability to enter/exit an investment position quickly

65
Q

Illiquidity or lack of a market for an asset, leads to a discount just large enough to

A

to purchase the non-traded asset rather than an identical marketable asset

66
Q

Control is:

A

– Control is the right to:
o Direct the strategy and activities of a firm
o Allocate the resources of the firm
o Distribute the wealth of the firm
– Control is a call option on the alternate strategies available

67
Q

– The purchase premium should not be

A

used as a proxy for the control premium

– The control premium is the price of the control right

FINC3013 - M&A FINAL (9 decks)

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