BIWS Steps in Merger Modeling

Question 1

Step 1

Answer 1

Determine the Purchase Price: • DCF • Public Comps • Precedent Transactions

Question 2

Step 2

Answer 2

Determine the Purchase Method, using one or a combo of the following: • Cash • Debt • Stock

Question 3

Upside/Downside of Using Cash in M&A

Answer 3

Upside: • If buyer’s company is undervalued, they would be given their stocks away on the cheap in merger, so cash is the optimal alternative • Interest rate on cash is lower than interest rate on debt Downside: • Forego interest on cash, but usually di minis (less than 0.5%)

Question 4

Upside/Downside of Using Stock in M&A

Answer 4

Upside: • Necessary if you’re cash-strapped Downside: • It can have dilutive effect

Question 5

Step 3

Answer 5

Select the Financial Profiles and Statements of the Buyer and Seller - Bucket items on I/S - Shares outstanding and EPS - Debt (for “Has” and “Gets” model)

Question 6

Step 4

Answer 6

Combine Buyer and Sellers’ Income Statements • Break out synergies (think Wolkoff’s approach to modeling hotel/casino DCF’s)

Question 7

Step 5

Answer 7

Calculate and Goodwill and Estimate a Purchase Price Allocation

Question 8

What happens when a buyer acquires a seller to the Shareholders’ Equity

Answer 8

Shareholders’ Equity is wiped out and goes to 0, as it no longer exists as an independent entity

Question 9

What happens to the balance sheet when the following occurs?

• The buyer has $10,000 in Assets, $8,000 in Liabilities, and $2,000 in Shareholders’ Equity.
• The seller has $1,000 in Assets, $800 in Liabilities, and $200 in Shareholders’ Equity.
• The buyer pays $500 for the seller, using 100% cash.

Answer 9

• Assets increase by $800 ($300 is goodwill)
• Equity is wiped out to $0

Question 10

Step 6

Answer 10

Combine the Balance Sheets and Adjust for Acquisition Effects, namely:

• Current Assets: You add most of these items, and
subtract any Cash the buyer uses to acquire the
seller.

• Long-Term Assets: You adjust the PP&E value up
or down, and also adjust the values of Goodwill
and Other Intangible Assets depending on the
previous step.

• Current Liabilities: You add everything here,
perhaps adding or subtracting Debt if the
buyer uses Debt to acquire the seller or pays
off the seller’s Debt.

• Long-Term Liabilities: You add most items here, but you add or subtract Debt if the buyer uses Debt to acquire the seller or pays off the seller’s Debt; you may also adjust the Deferred Tax Liability.
• Shareholders’ Equity: You wipe out the seller’s Shareholders’ Equity, but add the dollar value of new shares issued by the buyer

Question 11

Step 7

Answer 11

Adjust the Combined Income Statement for Acquisition Effects, namely:

• Synergies: If you’ve assumed revenue or expense synergies, you need to reflect them here.

• Depreciation & Amortization: If you’ve assumed changes to PP&E or you’ve created Other Intangible Assets, you need to reflect the new D&A expense
on the combined Income Statement.

• Foregone Interest on Cash: If the buyer uses cash to acquire the seller, this equals Cash Used * Interest Rate.
• Interest Paid on New Debt: If the buyer uses debt to acquire the seller, this equals Debt Used * Interest Rate.

• Shares Outstanding: If the buyer issues shares to raise the funds to acquire the seller, the new number here equals Old Buyer Shares Outstanding + Number of Shares Issued in Deal.

Question 12

Step 8

Answer 12

Calculate Accretion / Dilution and Create Sensitivty Tables: