M&A Flashcards
What is the difference between an accretive and dilutive merger?
How do you decide if the merger will be accretive or dilutive?
What parts of the deal influence whether or not it is accretive or dilutive?
A deal is accretive or dilutive based on the acquirer’s pre and post EPS. If the pre acquistion EPS is greater than the post acquisition EPS, then the deal is dilutive.
If the post acquisition EPS is greater than the pre acquisition EPS, then the deal is accretive.
Whether or not the deal is accretive or dilutive depends on how the acquisition is financed. Cash and no equity would mostl likely lead to an accretive deal. But, once equity becomes involved, that increases the chance of the deal becoming dilutive.
If the acquirer is purchasing a company that has an offer P/E ratio lower than the acquirer, then the deal is accretive, because the acquirer will be paying less per dollar of earnings than where it currently stands.
If the acquirer is purchasing a company that has a higher offer P/E than itself, then the deal is dilutive, because the acquirer will be pay more per dollar of earnings than it currently does.
What are the three types of mergers, and what are the benefits of each?
Horizontal, vertical, conglomerate.
A horizontal merger is a merger with a competitor that will likely result in synergies.
A vertical merger is with a supplier or distributor and is designed to cut costs.
A conglomerate merger is a merger with another company in a completely unrelated business with the idea of product/market expansion.
What is a fairness opinion?
A fairness opinon is an opinion by the investment bank certifying that the transaction is “fair”.
What is a dividend recapitalization?
A dividend recapitalization takes earnings out of the company a PE firm has acquired. Instead of the FCF of the firm it acquired only used to pay down debt, the PE firm can take on additional debt to pay down the original debt it had and then pay off the owners of the PE firm.
How could a LBO firm increase its returns on a LBO investment?
There are multiple ways:
- Lower initial sales price
- Take out more debt and decrease equity
- Hold the company for a longer period of time realizing the cash flows from the company
What is the difference between Goodwill and other intangible assets?
Goodwill is NOT amortized, whereas intangible assets ARE amortized.
What is the Treasury Stock Method?
A way of taking into account employee stock options, convertible debt, and preferred stock to calculate fully diluted shares outstanding.
First, you have to assume that all in-the-money options will be exercised. Then, assume all proceeds generated from the exercise of options will be used to repurchase company stock at the current price.
Ex: Here is the methodology:
•• Begin with the company’s common shares outstanding. This can be found in its most recent 10-K
or 10-Q. For this example, assume there are 1,000,000 shares outstanding.
•• Then go to the 10-K or 10-Q and find the options chart. The options that will be exercised are
those with a weighted average exercise price below the current market price. Assume there are
100,000 shares with a W.A.E.P. of $5 and the stock is selling for $10 currently.
•• This means that 100,000 new shares of stock will be issued, and the company will profit $500,000
from the sale of those shares. Now there will be 1,100,000 shares.
•• That $500,000 profit will then be used to repurchase shares in the open market at $10 per share.
•• The company will repurchase 50,000 shares, meaning there will be 1,050,000 shares after the
exercise of the options.
What is an exchange ratio in an M&A transaction?
It shows how many shares the acquirees will receive per 1 of their shares
Offer price/acquirers price x % stock contribution
If company A purchases company B, what will the new balance sheet look like?
It will be the sum of the two balance sheets (but only the target’s assets and liabilities- equity is zeroed out)
. However, Goodwill will change in the event the acquistion price is greater than book value. Goodwill will fall under intangible assets.
Add additional debt and addtional equity
Think of 2 companies that should merge.
What is a divestiture?
A company wants to sell off a portion of itself. It is still an acquisition, but it is more difficult given that you have to identify specific financials for that operating division.
What is the difference between shares outstanding and fully diluted shares?
Shares outstanding is the number of shares currently held by investors.
Fully diluted shares are the number of shares that would be held if all “in the money” options were exercised.
What are some defense tactics a company could take to prevent a hostile takeover?
Take on addtional debt through M&A, etc
Share repurchases
Cost cutting, etc to boost stock price
The poison pill allows current shareholders to purchase additional shares at a discount of the company gets taken over, thus diluting the new acquirers share of the company.
What are some reasons two companies would want to merge?
The main reason is for the synergies to be achieved. Other reasons include growing market presence, breaking into new categories, taking advantage of research, patents, ideas, etc.
What is a cash offer?
To pay for an acquisition using cash.
