M&A Flashcards
Walk me through a merger model
- Determine a purchase price
- Build the sources and uses (so we can know how the acquirer will finance the transaction - stocks, debt or cash)
- Next we should add up the acquirer and the targets stand alone financials (Revenue, COGS) and make pro formula transaction adjustments (example: synergies and incremental interest expense)
This would give the acquirer’s EPS after the transaction
What are synergies in M&A?
When two or more companies come together and they can do something that they couldn’t have done it alone (Financial and Operational)
What is goodwill in M&A?
Goodwill captures the premium paid in exercise of the far value of the net identifiable assets
What is the control premium in M&A?
Diference between the offer price per share and the acquisition target’s market share price
Which type of buyer is more likely to offer a higher purchase premium: a strategic buyer or a financial buyer?
A strategic buyer because they will have more synergies
What are the three common sale process structures in M&A?
- Broad Auction
- Targeted Auction
- Negotiated Sale
What type of material is found in an M&A pitchbook?
- Introduction
- Situational Overview
- Market Trends
- Valuation
- Deal Structure
- Credentials
- Appendix
What does accretion/dilution analysis tell you about an M&A transaction?
After a merger or acquisition, if the pro forma earnings per share (EPS) of the combined entity exceeds the acquirer’s original EPS, the transaction is “accretive.” Conversely, if the pro forma EPS is lower, it’s considered “dilutive.” Although accretive transactions are viewed positively, they don’t necessarily indicate realized synergies or value creation. Companies focus on post-deal EPS due to potential market reactions, as a dilutive transaction can lead to a decline in the acquirer’s share price. Nonetheless, many dilutive deals proceed and can still be strong strategic acquisitions.
What are some potential reasons that a company might acquire another company?
- Revenue and Cost Synergies
- Upselling/Cross-Selling Opportunities
- Proprietary Assets Ownership (Intellectual Property, Patents, Copyright)
- Talent-Driven Acquisitions (“Acqui-Hire”)
- Expanded Geographic Reach and Customers
- Enter New Markets to Sell Products/Services
- Revenue Diversification and Less Risk
- Horizontal Integration (i.e. Market Leadership and Less Competition)
- Vertical Integration (i.e. Supply Chain Efficiencies)
Is it preferable to finance a deal using debt or stock?
When a company buys another, they can pay by borrowing money (debt) or by giving the other company’s owners some of their own company’s stock (shares).
For the Buyer:
If the buyer’s company has a much higher price-to-earnings (P/E) ratio than the company they’re buying, paying in stock can be smart. Why? It makes the combined company look more profitable. But borrowing (debt) can be good if they can get low-interest loans and keep a good credit score.
For the Seller:
Most sellers prefer cash, which usually means the buyer took on debt to pay them. This is because cash is straightforward and doesn’t depend on the stock’s future. But sellers might agree to take stock instead of cash if it saves them on taxes or if both companies are similar in size and already trade on the stock market.
What does purchase consideration refer to in M&A?
In mergers and acquisitions (M&A), “purchase consideration” is how the buyer plans to pay for the deal. This could be with cash, borrowed money (debt), shares of stock, or a mix of these.
Types of Payment:
All-Cash Deal: The buyer pays entirely in cash, creating an immediate tax event for the sellers since they’re “cashing out.”
All-Equity Deal: The buyer pays with shares, meaning sellers don’t owe taxes until they eventually sell those shares, hopefully at a profit.
What Sellers Think:
If sellers believe the new merged company will do well, they’re more open to taking shares as payment. If they have doubts about the company’s future, they’d likely prefer cash.
