M&A Flashcards
What is a “Material Adverse Change Event (MAC)” clause in a merger agreement?
- events that can have an adverse, unavoidable, impact to the
performance of the company itself - give the buyer the right to walk away from the acquisition before closing, if events occur that are detrimental to the target company
- essential to realise that, for the invoking of a MAC clause to be successful, the events
that occurred fell beyond the control and expectation of the acquirer
Why large bulge-bracket banks might win more M&A mandates than boutiques?
- Trust: Businesses tend to trust large global banks more. Turnover level, number of years in the industry, size of company, reputation of company can contribute towards the ensuing level of trust
- perception that large, reputable, banks are more capable of undertaking their M&A transaction effectively (on time, and
with minimal inaccuracies) - Less bureaucracy
What is the purpose of conducting due-diligence?
- Due diligence is an audit or investigation of the target company to confirm (verify) facts
about the target company before the buyer proceeds to finalise the purchasing transaction - All of these reduce the likelihood of unexpected surprises, and, hence, the possibility of triggering a MAC clause
List one potential acquiring company motivation for entering into an M&A transaction?
- Value creation
- Reduced costs
- Diversification
- Increase in financial capacity
- Benefit acquirer’s managers revenue
Why might investors prefer equity buybacks rather than dividends?
Tax advantage with share buybacks, over and above dividend payments.
- Income vs Capital gains/losses tax
- Anti-dilutive
- Signal of undervalued shares
Describe the payback period in the context of project evaluation. Highlight some of its pros and cons.
Payback refers to the period of time needed for a project to cover its initial investment
+ Simple and easy to calculate
+ Period may be used as a benchmark for risk
- Ignores time value of money
- Negates CF after payback period
Explain what a discounted cash flow analysis involves
DCF relies on calculating the cash flows an asset generates, projecting when they are generated and takes into account how risky the cash flows are expected to be.
National, and global economic conditions, the economic environment in which the company operates, the industry in which it operates, the time value of money, the potential for inflation.
How might anti-trust law affect M&A activity in an industry?
Anti-trust law refers to the legislation that deters businesses from colliding so as to
manipulate prices.
- Attempts to avoid the potential formation of monopoly
- Healthy competition, both for other competing firms, and
customers
Suppose that a high P/E ratio company undertakes acquisitions frequently and usually buys companies with lower P/E ratios than itself.
High P/E firms purchasing low P/E companies will initially (i.e. in the short) appear to be accretive
- In the medium to long term, the market is likely to re-rate the P/E ratio of the acquiring company downwards. The serially acquisitive parent’s P/E ratio will go downwards over time if it continues to buy lower P/E companies.
- However, this type of serial acquisition need not necessarily be value-destructive. The accretiveness of the transaction doesn’t guarantee that the purchased entities were “cheap” or “fair-valued” or “expensive”. In fact, each of the targets could have been any of those things at the time of purchase (yet still show as accretive to the acquirer)
- As a result, we cannot say if this kind of serial-acquisition strategy is value-enhancing or value- destructive with only this information in hand.
What valuation multiples might you look at when valuing a company using comparables?
P/E multiple
EV/Sales
EV/EBITDA
P/S multiple
P/CFO multiple
How do you choose relevant comparables (i.e. competitors) for a company when attempting to value a firm?
- Industry
- Size
- Region
- Others
What is an accretive transaction? What are the main factors that enable a deal to be
accretive?
An accretive transaction is one which causes the acquiring company’s EPS to increase post-acquisition.
An accretive transaction occurs when the acquirer’s P/E is greater than that of the target.
Factors: price, no MAC, estimated earnings are realised, correct due diligence.
EV
Market cap + Debt + Pref stock
What is LBO
Normally 60-70% of purchase is funded by debt
- Tax saving
- Higher ownership acquisiton
- Equity holders can get more dividends
What types of firms are typically bought in an LBO?
- Strong cash flow generation
- Strong asset base
- Low fixed costs
- Low CapEx
- Defensible market position
- Little debt
- High growth-potential
