Conceptual Questions

Question 1

What is the real purchase price?

Answer 1

• dep on exact treatment of sellers cash and debt, transaction fees
• but closest to Purchase EqV
• eg. excess seller cash usuall distributed to shareholders
• eg. buyer usually refinances existing seller debt and replace w debt in same amt so doesn’t pay extra for it
• could end up with Purchase Equity Value + Transaction/Financing Fees
  – Seller’s Excess Cash
• but variations are possible

Question 2

Why in the purchase price equation for public cos, debt is not mentioned?

Answer 2

b/c buyer almost always refinances seller’s existing debt and replaces it w new debt in same amt
- so no “paying extra”

Question 3

What info do you need from both cos to start merger model?

Answer 3

minimum IS projections for next couple of years

Question 4

What does a sources and uses schedule do?

Answer 4

• purchase price is not exactly equal to either Purchase EqV or Purvhase TEV
• so we need S&U to tells u how much buyer really pays for seller

Question 5

What is le structure of the Sources & Uses Schedule?

Answer 5

• U side: add up total cost of acquiring co, S side: amt of cash debt stock to pay for everything

Question 6

Cash free debt free private seller vs standard public m&a- diff when deal closes?

Answer 6

for private
- cash and debt set to 0
- cash replaced to seller min cash
- debt replaced with new issuance to same level

Question 7

Cash free debt free private seller vs standard public m&a- purchase price multiple?

Answer 7

TEV multiple, not share price premium

Question 8

Cash free debt free private seller vs standard public m&a- S&U

Answer 8

based on Purchase TEV, target min cash, transaction fees

Question 9

What is the purpose of a purchase price allocation scedule?

Answer 9

• estimate goodwill
• write ups of assets eg. PPE, intangibles
• creation of DTLs
• changes to existing deferred tax items

Question 10

Why do Deferred Tax Liabilities get created in many M&A deals?

Answer 10

• in an M&A deal in which buyer purchases all seller’s shares and gets everything seller has
• DTLs created b/c the D&A on asset write ups is not deductible for cash tax purposes in a stock purchases

Question 11

Why do many merger models overstate impact of synergies?

Answer 11

• many don’t include costs associated w revenue synergies eg. COGS, Opex
• realizing synergies takes time- not just in Y1

Question 12

How do you calculate the combined co’s debt repayment capacity in merger model?

Answer 12

• create mini cash flow statement
• elimiate most of financing and investing sections except for capex
• keep CFO

Question 13

How should you treat stock based compensation?

Answer 13

• SBC problematic b/c increases diluted share count and reduces value to existing shareholders
• but difficult to estimate impact since have to project details of SBC
• so easiest to count as cash operating expense, don’t add back on standalone and combined CFS

Question 14

IRR vs DR way of judging M&A- cons?

Answer 14

• which DR to use? buyer, seller or weighted average?
• where do synergies get credited to? buyer or seller?
• Is terminal value for synergies justified given that they won’t last forever?