Lecture 7- Corporate takeovers and restructuring part 1 Flashcards
What is the comparable companies analysis? Can you describe the steps in the comparable companies analysis?
This is the most natural way to value things
1) we come up with a list of firms that we are going ot compare with the target firm
2) We calculate the various measures used to make comparisons
3) Finally, we compare target firm with comparable firms and draw conclusions
What kind of firms should you use to compare your firm with? (4 kinds of measures)
You should choose firms that are more comparable to your firm, or firms that match your goals lol could be skewed in the other analysts pov.
- pick firms in the same sub-industry as your firm, altho differences such as where they are located in the value chain, target customers will appear
- some targets may be found in an emerging market(not necessarily in sub-industry)
- look at size, profitability, growth and ROI, firms in same sub industry will be similar in these
- after you select comparable firm, calculate measures used to make comparisons
Why do we use fully diluted number of shares outstanding? what is the formula for this? What kind of securities do you want to consider?
Fully diluted number of shares outstanding is:
Equity value= share price * fully diluted number of shares outstanding
we use this bc instead of number of shares outstanding, we want to incorporate stock options, warrants and convertible securities that the firm has issued which will have potential to grow into new shares.
- only consider in the money securities, expect them to turn into new shares (only treated as if they are turned into new shares)
- at the money and in the money can be considered
The treasury stock method is derived from the stock options/warrants you can convert when you have fully diluted shares. What is this method?
Key idea: all the in the money options and warrants will exercised. When it is exercised, firm will issue new stocks and recieve cash. Assume using this to buy back shares in the company (treasury stocks) at market prices.
Example: if firm has 5 million stock options outstanding, exercise price is $18, current market price is $20.
Since in-the-money, exercise. So firm recieves proceeds of 5*18=$90 mil
using $90 mil, can repurchase $90/$20=4.5 million shares
The net effect is that number of shares will increase by
5-4.5=0.5 million shares.
What are convertible bonds? What is a way the firm converts and sells and buys these?
These are bonds that able to be converted into common stocks / equity. Bond is removed from liability and interest removed from income statement.
Example:
Firm has $150 million in convetible bonds outstanding, with conversion price of $15. Current share price for firm is $20.
when conversion price lower than share price, it is in the money
when converted, $150 million turns into $150/15=$10mil shares and this is worth $10mil x 20= $200 mil shares
What is the precedent transaction analysis? Is it similar to the company comparable analysis? And what is this more relevant to than the company comparable analysis
The precedent transaction analysis is similar to the company comparable analysis except we don’t use market prices, we use the values paid in acquisition.
It is more relevant to the takeover analysis as the comparable company analysis implicitly assumes the current market price of firms is the relevant price for takeover offer price.
What happens in a takeover? What does the acquirer do?
In a takeover, the acquirer usually doesn’t try to buy shares in the target firm. It tries to takeover the entire or majority of the firm’s shares through a tender offer.
Why do most acquirers offer a premium over current market price for shareholders of target firm?
- acquirers get control over target firm
- acquirer has the opportunity to realize synergies
What is the downside of precedent transaction analysis?
There may not be any recent transaction to analyze, and transaction that you can analyze may have happened a long time ago or in diff industries lmao
Name one difference between precedent transaction analysis and the comparable company analysis
precedent transaction analysis uses offer price to calculate value of equity.
What is a DCF and what do you do in a DCF? (Hint: any particular measurements used, and why is that used?) Is it conceptually different from the NPV?
A DCF analysis is conceptually same as NPV.
In a DCF analysis, you aim to calculate the value of a firm, whereas the NPV tells you whether you should invest in a particular project.
DCF is more practical in the sense that it explicitly involves usage of available accounting data
How do you calculate enterprise value? Is the enterprise value affected by capital structure? Why do we use total debt and not total liabilities in the enterprise value equation?
Enterprise value= equity value + total debt +preferred stock + non controlling interest - cash and cash equivalents
The enterprise value is not affected by capital structure, it will make it easier for us to compare firms with different capital structures.
We use total debt and not total liabilities because we are interested in capturing the capital that is raised to fund productive assets (BECAUSE YOU USE DEBT TO FUND CAPITAL WOWOWOW MINDBLOWN) but debt not always used heheh
Why do we use non-controlling interest inside the equity value equation?
Noncontrolling interest arises when a firm acquires another firm but does not buy 100% of ownership of the other firm, maybe like 2.5% not bought . We add this bc 100% of the target’s assets are included as part of the acquiring firms assets in its consolidated financial statements
What are some other measures of Enterprise value? (Hint: three ways, and what are the formula for these and how are they used?)
EBITDA: EBIT plus amortization and depreciation. It is often paired with
EV/EBITDA to find EV
LTM (last twelve months) financial data:
Most recent financial information contained in quarter reports. We look at last four quarters of a financial report. (or last twelve months). Take last fiscal year’s data add the year to date financial data for current year and subtract corresponding year-to-date financial data from previous year
Formula:
LTM= prior fiscal year + current stub - prior stub
ROIC: measures return generated by capital provided to company.
EBIT/ average of beginning and ending net debt + book value of equity
What are some other measures of Enterprise value? (Hint: three ways, and what are the formula for these and how are they used?)
EBITDA: EBIT plus amortization and depreciation. It is often paired with
EV/EBITDA to find EV
LTM (last twelve months) financial data:
Most recent financial information contained in quarter reports. We look at last four quarters of a financial report. (or last twelve months). Take last fiscal year’s data add the year to date financial data for current year and subtract corresponding year-to-date financial data from previous year
Formula:
LTM= prior fiscal year + current stub - prior stub
ROIC: measures return generated by capital provided to company.
EBIT/ average of beginning and ending net debt + book value of equity
How do you calculate WACC?
we use market value for of debt and equity for WACC, ( for private firms you may use book value )
What is unlevered beta? What is the formula :D (write it down if you can)
Unlevered beta takes the effect of leverage out of the cost of equity.
According to MM, cost of equity should be higher for firms with more leverage (insider info)
BL = Bu (1 + (1 -t)*D/E)
BL: levered beta
BU: unlevered beta
What do ya do after calculating WACC? (why is this important too)
After calculating WACC, we need to estimate terminal value to finish our analysis.
This is important because, it constitutes the biggest part of the value of the firm.
How do you calculate the terminal value ? (formula as well pls)
assume perpetual growht at end of cash flow projection period
V0= CF1/r - g
g= V0*r - CF0/V0 +CF0
What is the net share settlement method?
Bonds is specified so that only value in excess of the bond is assumed to be converted into stocks
e.g a firm that has $150 million in convertible bonds outstanding with conversion price of $15. current share price is $20. Par value of bonds are $150 million, but conversion is $200 :0
In net settlement method, assume $150 is kept as bonds and the excess $50million is converted into equity. This gives $50m/20=2.5 million shares
we just adjust number of shares and not balance or income sheet
