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Resturcturing > Lecture 3 > Flashcards

Lecture 3 Flashcards

TYK questions

1
Q

Does value ceration in M&A transactions depend on the structuring of such a transaction?

A

NO: pooling of economic interest; value creation as a whole should not be affected by structuring (except if it leads to corp. governance changes)

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2
Q

What is a sale of shares?

A

Buying shares in exchange of cash

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3
Q

In a cash deal (sale of shares), how is the unconsolidated BS of the buyer affected? Another name for “unconsolidated account”?

A

Net debt incerase by the amount paid for target equity. Fixed asset increases by the value of shares bought (equal to the amount paid in cash)
Unconsolidated account = statutory accounts?

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4
Q

3 main covenants used in bank financing

A

Gearing: Net debt / SHE
Leverage: Net debt / EBITDA
Interest coverage: EBIT (or EBITDA - pre or post tax)/ Interest expense

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5
Q

Gearing vs Leverage ratio as an indicator of creditworthiness?

A

Leverage ratio since much more sensitive to a decrease in FCFF generation

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6
Q

Three sources of financing for cash deal

A

1) Cash on BS; 2) Raise debt from banks; 3) capital increase (needs to be bridged)

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7
Q

Difference between mixed offer and full cash offer partially financed by capital increase

A

Capital increase: issue shares below current share vale (give inventive)
Mixed offer: Issue shares to target shareholders without a discount –> less dilution (risk of flowback: downward pressure on shareprice)

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8
Q

Key elements to add/substract when computing EPS pro forma in cash deal?
What number of shares to use?
Change of Control clause in debt?

A

NI bidder + NI target - Net financial charges - amortization of software - restructuring cost + synergies
Number of shares remains the same
CoC clause: NI of target -> EBIT(1-t), Interest based on EqV paid and debt of target refinanced

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9
Q

Rule of thumb cash deal accretive / dilutive

A

No syn + no transaction cost

P/E Debt = 1 / (cost of acquisition debt * (1-t)) > P/E Acquistion –> accretive

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10
Q

Impact net debt and equity in cash deal buyer?

A

SHE does not change but Net Debt increases (–> higher financial risk)

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11
Q

Synergies to breake even

A

Syn. b-e = [(Bidder’s EPS - PF EPS) x PF#Shares]/(1- marg. t Bidder)

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12
Q

Sensitivities for accretion/dilution

A

EPS against %premium paid and %stock consideration

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13
Q

Key outputs to make sensitivities about

A

ND/EBITDA PF level against %premium paid and

%stock consideration

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14
Q

Why should M&A deals be accretive?

A

Believed that P/E post deal remains same and that company is valued at P/E basis –> share price goes up

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15
Q

How to compute Goodwill? IFRS rule?

A

Excess paid over FV of Target Net Assets and other indentifiable intengiables
IFRS3: Business combinations

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16
Q

Examples of FV adjustments and identifiable intangible assets in PPA?

A

FV adjustments: Goodwill deduction, Asset step up or down

Identifiable intangibles mostly bands, client list, technology

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17
Q

PF consolidation BS

A

Bidder BS + Target BS + Deal Adj.

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18
Q

How to mitigate operating risk that bidder takes in cash deal

A

Earn-out (2-3y post-closing)

Warranties/indemnities for compensation for shortfall in asset or additional liabilites) with bank gurantee

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19
Q

Financial structure after share swap

A

Target company still exists and is 100% subsidiary of buyer

20
Q

Exchange Ratio in share swap?

A

ER = rel. weight * (Shares B)/(Shares T)

rel. weight = (EqV Target) / (EqV Bidder)

21
Q

Share swap: unconsolidated BS of bidder

A

Fixed asset move up by value of Target shares
SHE moves up by value of shares issued to pay target shareholders

ND does not move

22
Q

Anti-dilutive provisions?

A

Pre-emptive rights: offering to existing shareholders in priority new share iussued
Free shares offered in case new shares are issued at a price lower than the share price as existing SH have bought

23
Q

Drag along clause

A

Forces minority shareholders to sell if (75% )of majority SH sell to someone who wants 100%

24
Q

Tag along clause

A

Majority SH sells: minorty SH has right to sell;

25
Q

Deadlock provision

A

Provision that kicks in if there is strong disagreement or if common objective is not reached between shareholders. Could be

1) put option of minority SH towards majority SH
2) Majority SH having call on share

26
Q

Main difference of EPS calc. share deal vs. cash deal

A

Share deal no additional interest but number of shares increases

27
Q

Rule of thumb to know if a share deal is accretive / dillutive?

A

P/E buyer > P/E seller –> accretive

28
Q

Main difference in pro-forma cons. BS share deal vs. cash deal?

A

SHE: goes up by amount paid in share deal
ND: goes up by amount paid in cash deal

29
Q

Share swap vs. legal merger

A

Shware wap target company becomes 100% owned subsidary. Legal merger target company ceases to exist (all assets and liabilites absorbed)

No change in cons. B/S

30
Q

Leagal process of legal merger

A

Legal merger: make both set of shareholders vote for the merger and have BoD agree on merger,
get independent expert draft their report to ensure the fairness of the merger
In addition creditors of B or T can oppose the merger

31
Q

Main tax consequences of legal merger (France)?

A
  • Provisions of target and capital gain taxes (CGT) on sale of target share.
  • Most of time: tax benefit i.e. no CGT for SH of T, shares brought and provisions
  • TLCF can be used if target’s activity continues for min. 3y
32
Q

Main difference in risk/return for bidder in cash vs. share deal

A
  • Share deal: share op./fin. risk and upside (+ control!)

- Cash deal: take all risk (higher due to leverage) and upside

33
Q

Price paid for a Target in a share vs. cash deal

A
  • Cash: absolute amount in €

- Share: Value target relative to your own firm

34
Q

Asset contribution: Affect on BS

A
  • Bidder: SHE increases by amount of equity raised to pay for Target’s assets; Asset increase by value of asset contributed
  • Target: Asset side goes down by Asset contributed and up by SHE received
  • -> very often disconnect between BV and value of assets contributed i.e. “one time” profit -> gain on asset sale goes to SHE
35
Q

Asset contribution: % of ownership

A

% ownership target = Value of assets brought / (Value of assets brought + Equity value of bidder)

36
Q

Asset contribution: Goodwill?

A

GW if value of asset contribution > (FV assets contributed + intangibles)
Computation the same as for classic sale of share trans. but BV of assets contributed and not BV of net assets of target

37
Q

Asset contribution: Purpose of contributing all operating and financial assets but keeping net debt? What might be kept as well?

A

Benefiting of pot. synergies and only keep dividends paid by the bidder to pay ND. Target becomes Holding.
Often also keep Real Estate assets to receive “less risky” cash through lease.

38
Q

Asset contribution: Legal process?

A

Capital Increase:

1) Super-majority of Bidder SH at GM
2) Assessed by contribution auditor or independent expert
3) T has to approve at GM

39
Q

Asset contribution: Classical clauses in SHA

A

Very similar to share deal: representation of T

1) Shareholders on BoD of Bidder
2) Reciprocal right of first refusal
3) Drag along, tag along
4) Representation at the governing bodies
5) Exit clause of T. (similar to deadlock provision) as in our case T has a minority stake

40
Q

Asset contribution: Pro-forma EPS

A

NI Bidder + EBIT(1-t) + ((1-t)*synergies - impl. cost - extra amortization)
Share count: add #new shares issued

41
Q

Asset contribution: Tax treatment? In France?

A

T: CGT on difference between contribution value and BV

France: if “autonomous” entity, contributor entity can benefit from “merger tax treatment”, i.e. deferral of CGT provided shares are hold for min. 3y

42
Q

Asset contribution: Risk/return profile of entity receiving. Value of assets contributed?

A

Like in share deal: bidder shares operating risk but will share as well upside (and the control)

Valuation is relative as paid in shares of bidder. Therefore, high value on asset provided Bidders shares are valued highly as well

43
Q

Asset contribution: Tax benefit Bidder?

A

Benefits from tax shield through assets step-up realized during the AC

44
Q

Three adjustment mechanism from signing to closing

A 
Net Debt (buyers should not suffer from increase)
WC (especially in seasonal business)
Other aggregates (e.g. EBITDA, CAPEX) (protections against performance variations)
45
Q

Earn-out agreement

A

Call instrument to receive additional future payments

Resturcturing (4 decks)

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