Acquisition Effects + Synergies

Question 1

What are the effects of an acquisition

Answer 1

• foregone interest on cash - the buyer loses the interest it would have otherwise earned if it uses cash for the acquisition
• additional interest on debt - the buyer pays additional interest income if it uses debt
• additional shares outstanding - if the buyer pays with stock, it must issue additional shares
• combined financial statements - after the acquisition, seller’s financial statements are added to the buyers
• creation of goodwill and OI - these BS items represent the premium paid to a seller’s shareholders’ equity also get created

Question 2

Why do goodwill + other intangibles get created in an acquisition

Answer 2

These represent the amount buyer has paid OVER the book value (SE), of the seller.
- can calculate the number by subtracting the sellers SE from the
- goodwill and OI represent the value of customer relationships, employee skills, competitive advantages, brand names, IPR, etc

Question 3

Difference between goodwill and OIA

Answer 3

Goodwill stays same over many years and is not amortised.

OIA are amortised over several years and affect IS by reducing Pre-tax Income

Question 4

What are some more advanced acquisition effects that’s you might see in a merger model

Answer 4

• PP&E and fixed asset write-ups - write up the values of these assets in an acquisition, under the assumption market values exceed book
• DTL/DTA - you may adjust these up or down depending on asset write ups and deal type
• transaction and financing fees - factor these into the model somewhere
• inter company AR and AP - NO LONGER OWE
• deferred revenue write down

Question 5

Two types of synergies

Answer 5

Revenue - cross-sell/up-sell
Expense - consolidation, EoS

Question 6

How are synergies used in merger models

Answer 6

Revenue - add these to the revenue figure for the combined company then assume a certain margin on revenue, then reflect additional expenses related to this

Expense - reduce the combined COGS OR Operating expenses by this amount

Question 7

Are revenue or expense synergies more important

Answer 7

Revenue rarely taken seriously because so hard to predict.

Expense more important, as more straightforward to calculate.