Key Rules #4 and #5 Flashcards
What is the equation of the purchase price of a public co?
What you really pay
Target Purchase EqV + Transaction fees - target’s excess cash
How does target public co debt get treated?
- buyer assumes debt w no change, no repayment no replacement
- buyer replaces target’s existing debt w some amt of new debt
- buyer repays target debt w buyer’s cash
How likely is it that buyer will assume target debt w no change?
unlikely b/c against terms of debt issuance
buyer assume target debt w no change- effects?
- doesn’t icrease amount acquirer really pays for target
- target’s interest expense stays the same
Buyer replaces target’s existing debt w some amt of new debt- what are the effects?
- doesnt increase what buyer actually pays
- may increase target’s interest expense b/c higher leverage, more credit risk
Buyer repay’s target debt w buyer’s cash- how likely?
Unlikely
Buyer repay’s targets debt w buyer’s cash- what are the effects?
- increase purchase price
- increase inteerst expense of target
- buyer interest income change
Target’s excess cash- what about it?
doesn’t exactly decrease- Purchase EqV includes it but acquirer didn’t pay for it so gotta minus off
What is the max amt of cash in order to fund deal before fees?
combined cash - acquirer min cash - target min cash
Purchase TEV formula?
Purchase EqV + Target Debt - Target Cash
How are most acquisitions of private companies structured?
cash free debt free
What are acqs of private cos based on?
TEV and TEV mults
What is the actual purchase price of a private co?
Purchase TEV + transaction fees + target min cash
What do shareholders in a cash free debt free private co deal?
Purchase EqV
(Purchase TeV + cash - debt)
In a private co target, how do debt and cash get treated if debt > cash?
- target uses entire cash balance to repay as much debt as it can
- remaining debt subtracted from purchase price -> shareholder proceeds are lower
In a private co target, how do debt and cash get treated if cash > debt?
- target repays entire debt w cash
- remaining cash distributed to shareholders
What is combined EqV’s formula
- acquirer EqV + market value of stock issued in deal
What happens to seller’s value?
doesn’t disappear, gets trasnferred to cash stock debt buyer uses to acquire it
What is combined TEV formula?
acquirer current TEV + target purchase TEV
How does combined TEV and its mults change if financing method changes or if shares issued changes?
no change
Why doesnt combined TEV and mults change if financing mtd change?
NOA of acquirer and target stay same, just financing data
TEV EBIT EBITDA Rev don’t change are not per share metrics
What are the combined TEV mults, roughly?
In between acq trading mults and target purchase mults
Why does combined P/E change?
Combined NI changes b/c based on cash debt used and interest rates
But how could combined TEV mults change still?
- to assume it won’t change is too simple
- revenue synergies and expense synergies can change it
- if market doesn’t like deal
How could market not liking deal decrease Combined TEV?
- market doesnt like deal -> acquirer stock price fall -> purchase EqV and TEV same -> combined EqV, combined TEV lower b/c acquirer stock price lower -> buyer uses more shares to do deal -> deal less accretive
Combined PE mult- what can it look like?
in between mults of the cos
closer to co with larger PE mult
You can use the combined EBITDA of the combined company to see the Debt/Ebitda ratio to see if the acquirer can issue debt.
B/c they’re gonna be combined anyway so might as well.
