Corporate Finance: Mergers and Acquisitions Flashcards
Forms of M&A Integration
- Statutory merger: Target ceases to exist
- Subsidiary merger: Target remains (usually because of valuable brand)
- Consolidations: Both acquireror and target cease and new entity emerges
Requirements for Bootstrapping Effect
Bootstrapping - The new entity has more EPS than the other two entities not because of an economic advantage but because of the merger.
- Acquirer must have a P/E ratio that is greater than the target
- Acquirer’s P/E doesn’t fall after the merger.
Poison Pills (3-types) + Puts
- Flip in pill: Target shareholders can buy target shares at discount
- Flip over pill: Target shareholders can buy acquirer shares at discount
- Dead hand: Pill can only be cancelled by vote of continuing directors
- Poison puts: Target’s bond holders can sell thier bonds back to target at par or above. (acquirer will need to raise a lot more capital to pay off bond holders)
Herfindahl-HIrschman Index (HHI)
HHI = ∑(Sales of firm i / total sales of market x 100)^2
- HHI of less than 1,000 indicates market is not concentrated
- HHI between 1,000 and 1,800 moderately concentrated - Merger will be challenged if HHI increases by 100 points or more.
- HHI above 1,800 is highly concentrated - Merger will be challenged if HHI increases by more than 50 points.
Target Company Valuation: DCF - Step One
Calculate PV of FCFF from NI from Proforma I.S. for the period analyst is confident about forecasts…
FCFF Calculation
- Net operating profit after tax (NOPAT)
- Net income
+ Interest after tax (int X (1-Tr))
Unlevered income
+ Change in deferred taxes (YoY Δ in taxes from I.S.)
NOPLAT
+ Depreciation
- Δ Working Capital
- Capex
Free Cash Flow
- Change in defferred taxes is just the difference between the current year’s DT and the year before on the income statment.
Target Company Valuation: DCF - Step Two
The PV of the terminal value of the target.
- Contstant Growth Model
[FCFF last year in stage one X (1+G)] / (WACC - G) - Relative valuation model
FCFF last year in stage one X expected valuation multiple (estimate)
Target Company Valuation DCF: Discount Rate?
- Non-control then use target’s WACC
- Potential merger then adjust the WACC to account for additional merger risk
Target Company Valuation: Comparable Company Analysis
- Comparable companies are identified
- Average valuation multiples are calculated (PE, P/BV etc.)
- Multipes are then applied to target plus a takeover premium and the average estimated stock price is calculated.
- Repeat that process for takeover premium + Step 3 value
Target Company Valuation: Comparable Transaction Analysis
No need to create separate multiples and acquisition premium since estimates are derived from comparable companies that are post merger.
- Identify merged company comparisons
- Caculate valuation multiples based on transaction valuation and calculate average
- Apply average valuations to target company
Post Merger Value of A*
Va* = Va + Vt + S - C
Va: Value of A before merger
Vt: Value of t before merger
S: Synergies
C: Cash paid to target’s shareholders
Takeover Premium, Synergies and Acquirer’s gain
- Target’s gain (Takeover Premium) = (Cash + Stock Value) - Original MV
- Acquirer’s gain = Synergies - TP
- TP + Acquirer’s Gain = Synergies
Forms of Restructuring (4 types)
- Equity Carve Out: New entity’s shares offered to outsiders (cash inflow)
- Spin off: New entity’s shares are issued to existing P’s shareholders
- Split off: New entity’s shares are offered to existing shareholders in exchange for P’s shares.
- Liquidation: Assets sold off piecemeal - usually a bankruptcy
Pooling of Interest vs. Acquisition Method
- Pooling assets are brought over at BV and no good will is recognized on BS
- Acquisition method assets are brought over at fair value adn GW is on BS
IFRS vs. GAAP recognition of Goodwill
GAAP calculates goodwill based on the fair value of the entity minus the fair value of the company’s net assets (Full Goodwill)
IFRS calculates good will based on full goodwill or based on the fair value of the acquisition consideration minus the fair value of the acquirers percentage of the net assets.
- T has 900K in net assets but whole company is worth 1MM. A pays 800K for 80% interest in T. *
- GAAP & IFRS: 1MM - 900K = 100K goodwill (full goodwill)*
- IFRS: 800K - ( 900 X 80%) = 80K goodwill (partial goodwill)*
Greenmail
Takeover defense that is post offer and requires the target to buy back their own shares from A for a premium.
