M&A

Question 1

operating synergy

Answer 1

revenue enhancments/cost savings or higher sustained CF

Question 2

Financial snyergy

Answer 2

higher cash flow and or reduced cost of captal

Question 3

acquisition of excess cash/cash slack

Answer 3

type of financial synergy using the targets excess cash to fund high return buyer projects

Question 4

debt capacity

Answer 4

type of financial synergy: the merged firm’s earnings and cash flows are more stable than the stand-alone values, the merged firm may be able to borrow more (creating tax shields and lower cost of debt)

Question 5

Tax Benefits

Answer 5

type of financial snyergy:writing up the value of the target company’s assets to create higher depreciation tax shields, taking advantage of net operating losses to shelter taxable income, or undertaking a ‘tax inversion’ deals.

Question 6

Economies of Scale -

Answer 6

type of operating synergy: more efficient capacity utilization, purchasing power, elimination of overlapping facilities, etc.

Question 7

Greater Pricing Power

Answer 7

reduced competition allowing for higher market share and higher margins (note, this has to be an under- or unstated source of synergy to avoid antitrust challenges)

Question 8

Combination of Different Functional Strength

Answer 8

cross-selling and cross-branding (re-branding), combining a firm with strong marketing skills with one that has a good product line

Question 9

Higher Growth in New or Existing Markets

Answer 9

U.S. firm acquiring an emerging market firm with an established distribution network and brand recognition to increase sales of its products

Question 10

stand alone value

Answer 10

is the value of the company based on its current management/strategy

Question 11

Value of the combined firm, VAT

Answer 11

VAT = VA,sa + VT,sa + Vsynergies,AT

Question 12

the definition of synergies

Answer 12

Synergies = VAT – VA,sa – VT,sa

Question 13

improvement synergies

Answer 13

accomplished by simply changing management/strategy –closely associated with PE firms who pay a higher premium that MP

Question 14

pure synergies

Answer 14

requires the combination of two firms to accomplish incremental gains

Question 15

Value of a company

Answer 15

is what its worth to you, not how much you are willing to pay for it.

Question 16

Value of Company T to company A

Answer 16

V(t standalone) + Vimprovements (ta) + Vpure synergies of (ta)

Question 17

If your pure synergies are as high or higher than anyone’s pure synergies

Answer 17

you may win the competitive bid ;otherwise deal is negative NPV to shareholders

Question 18

NPV(a)

Answer 18

VT,sa+ Vimprovements,TA + Vpure synergies,TA – PPT

Question 19

NPV to company A

Answer 19

NPVA = (VT,sa + Vimprovements,TA + Vpure syn,TA) - PPT;

NPVA = (Vimprovements,TA + Vpure syn,TA)– (PPT - VT,sa)

Deal is only good for acquirer if total synergies of the transaction exceed the premium paid over target stand alone value

Question 20

NPVA = (Vimprovements,TA + Vpure syn,TA)– (PPT - VT,sa)

Answer 20

First time is total synergies, and second is the premium paid over the stand alone value of target

Question 21

Early Stage:

Synergy valuation

Answer 21

• Model as % of sales (or % of operating costs) based on announced synergies in precedent transactions
• Annual “Run Rate”—often multipled by a multiple (e.g. EBITDA or )
• Phase in

Question 22

After Due Diligence synergy valuation

Answer 22

• Detailed DCF modeling of synergies

- Utilizes manager projections and/or consultants

Question 23

Break-even” Synergy

valuation

Answer 23

Synergy needed to support a particular premium or avoid dilution of the buyer’s EPS.

Question 24

market capitalization

Answer 24

total dollar market value of the company oustanding shares

Question 25

Advantages of fixed ratio offer

Answer 25

results in highest deal value to seller; safest to buyer since the post-dilution merger ownership stake is fixed