Additional Questions from Notes Flashcards
What is a Sources & Uses Schedule?
Source of funds - anything that the buyer uses to pay for the company. Cash, Debt, and stock are the main sources.
Use of Funds - anything that increases the real amount that the buyer must pay for the seller.
What are some problems with merger models and EPS accretion / dilution?
EPS is not always a meaningful metric - a private company doesn’t care about EPS, also a company with negative net income wouldn’t care either.
Net Income and cash flow are very different - there’s a difference between profits and cash flows
Merger models don’t capture the risk of M&A deals - integration might go wrong, risk is barely mentioned in the model.
What is a purchase price allocation schedule?
In almost all M&A deals, the buyer pays a premium over the seller’s book value. This premium is not the premium to the current share price.
The premium above the book value will result in the balance sheet not balancing, so 2 new assets are created - Other intangible assets and goodwill to balance the balance sheet.
When is a deferred tax liability get created?
If there is a write-up of PP&E or if other tangible assets are created.
What is a Deferred Tax Liability?
A company expects to pay higher cash taxes than book taxes in the future.
Over time, the DTL will decrease as the company pays those higher cash taxes, and eventually, it will reach $0 once the write-ups have been fully depreciated or amortized.
What are the different deal and offer structures? (3)
Stock (Tender offer)
Asset
338(h)(10)
What is unique about the 338(h)(10) deal type?
Legally it acts like a stock purchase, but from an accounting perspective it acts like an asset purchase.
What is pooling of interests?
Used to combine balance sheets of two companies after a merger, assets, and liabilities transferred at their book value. The pooling method was phased out in 2001 and replaced by purchasing accounting.
what is purchasing accounting method?
Records assets and liabilities at their fair value as opposed to their book values.
What is included in a purchase agreement?
Purchase price and consideration
Representations and Warranties
No shop & go shop (Exclusivity)
