DBH - Technical Flashcards
What does purchase consideration refer to in M&A?
The purchase consideration in M&A refers to how an acquirer intends to pay for an acquisition, i.e. the proposed payment method to the target’s shareholders by the acquirer.
The acquirer can use its cash on hand, raise additional debt capital to fund the purchase, issue equity securities, or any combination of these.
What does accretion/dilution analysis tell you about an M&A transaction?
Accretion and Dilution refers to the impact of an acquisition/merger on the buying firm’s EPS. Can give an indication of whether a company should complete the acquisition.
Accretion - when the pro forma EPS is greater than the acquirer’s pre-deal earnings per share (EPS).
Dilution - When the pro forma EPS is less than the acquirer’s standalone EPS
Which deal structure is more likely to result in a higher valuation: an all-cash or all-stock deal?
Generally, an all-stock deal results in a lower valuation compared to an all-cash deal because the target’s shareholders are able to participate in the potential upside of holding shares in the new entity.
While shareholders in an all-cash deal receive straight cash, shareholders in an all-stock deal receive equity in the new entity and can profit from share price appreciation (and in theory, the upside of equity is uncapped).
If the transaction consideration were an all-cash deal, the proceeds from the sale would be fixed, so the net gain to the shareholders is capped.
What are synergies in M&A?
Synergies in M&A describe the estimated cost savings and incremental revenue generated from a merger or acquisition. Conceptually, synergies state that the combined value of two entities is worth more than the sum of the individual parts.
There are two types of synergies:
Revenue Synergies → Revenue synergies assume the combined entity can generate more cash flows than if the cash flows produced on an individual basis were added together.
Cost Synergies → Cost synergies entail corporate actions such as cost-cutting, consolidating overlapping functions, closing down unnecessary locations, and eliminating redundancies in employee roles.
Which type of synergies are most likely to be realized: revenue synergies or cost synergies?
Cost synergies are far more likely to be realized than revenue synergies. Cost synergies are viewed with more credibility because there are concrete areas that can be addressed.
While it might appear attainable initially, revenue synergies often do not materialize because these financial benefits are based on assumptions impacted by largely unpredictable variables.
Q. What is the difference between vertical integration and horizontal integration?
Vertical Integration → In vertical integration, two or more companies with different functions in the value chain decide to merge. Because the combined entity has increased control over the supply chain, the combined company should be able to eliminate operating inefficiencies with improved quality control, at least in theory.
Horizontal Integration → In horizontal integration, two companies competing in the same (or closely adjacent) market decide to merge. After the completed horizontal integration, the competition in the market declines and the combined entity benefits from the increased pricing power and leverage over suppliers, among various other benefits.
What is purchase price allocation (PPA)?
PPA involves making assumptions about the fair value of assets, where if deemed appropriate, the target’s assets are written up to reflect their real fair value (and the creation of deferred taxes).
The objective of purchase price allocation (PPA) is to allocate the purchase price paid to acquire the target across the purchased assets and liabilities so that their fair values are reflected.
What is goodwill in M&A?
Goodwill is an intangible asset on the balance sheet that captures the premium paid in excess of the fair value of the net identifiable assets, i.e. the excess purchase price.
What is the control premium in M&A?
The control premium represents the approximate “excess” paid over an acquisition target’s unaffected share price by the purchaser, expressed most often as a percentage.
The reason for paying a premium is often inevitable -no rational shareholder would give up their ownership stake without an adequate monetary incentive.
What are net identifiable assets?
The net identifiable assets, more specifically, is the book value of assets belonging to an acquired company after liabilities have been deducted.
Which type of buyer is more likely to offer a higher purchase premium: a strategic buyer or a financial buyer?
Strategic buyers are corporate acquirers that often operate in the same industry (or an adjacent market) as the target. Thus, strategics are able to can benefit from synergies, which directly allows them to offer higher prices.
What are the 5 main valuation methodologies
The three main valuation methodologies are DCF analysis, comparable company analysis and precedent transactions.
Asset Value (Liquidation or Breakup Value)
Trading Range (the range the stock has been trading during the past 52-weeks).
Of the three main valuation methods (DCF, Public comparables and transaction comparables), rank them in terms of which gives you the highest price.
It depends on the discount rate in the DCF, the comproable companies used, etc.
Generally, transaction comprables give the highest valuation since the transaction value includes a premium for shareholders over the actual value.
Who are our competitors
SAP
Oracle
Microsoft Dynamics and Azure
Netsuite
What is the CAPM?
Capital Asset Pricing Model - shows the relationship between the expected return and risk of investing in a security.
Risk Free Rate + (Beta x Equity Risk Premium)
