M&A analysis Flashcards
A company’s current share price is 50, it has 200 shares outstanding. There are 10 options with a strike price of 20 each. What’s the fully diluted equity value and share count?
In the money
After the options are exercised, firm recieves 200, repurchases 4 shares
Total share count 206
market cap 10300
What are RSUs? What are convertibles?
Restricted stock units. They turn into stock when certain conditions are met.
Convertibles are bonds that can be converted into stock
# of stock = par value/ conversion price
What are some common deal rationales?
Sell side
- larger platform, more resources
- retirement
Buy side
- cost and revenue synergies
- expand into new markets
larger market share
- prevent competition
A wants to buy B in an all-stock deal. A has a PE ratio of 10x, B has a PE ratio of 12x, is it accretive or dilutive?
We need to compare A’s WACA (weighted avg cost of acquisition) with the seller’s yield
WACA is 10%, while seller’s yield is 8.3%
dilutive
A wants to buy B using 50% debt and 50% equity. The pre-cost of debt is 10%, A’s P/E is 20x. B’s P/E is 15x and the tax rate is 20%. Dilutive or accretive?
WACA:
= 1/2 (5% + 8%)
= 6.5%
Seller’s yield: 6.67%
Accretive
A wants to buy B with 20% cash, 20% debt, and 60% stock. The buyer has a P/E of 8x, earns 4% interest on cash, and pays 6% interest on debt.
Seller has a P/E multiple of 10x
Tax rate 30%
Accretive or dilutive?
WACA:
cash and debt are tax-shielded
cash: 2.8%
debt: 4.2%
equity: 12.5%
weighted avg: 8.9%
seller’s yield: 10%
accretive
A buys B in an all-stock deal. A has 10 shares outstanding at $25 and NI of 10. B is acquired for EQV=150. B has NI of 10. Is it accretive or dilutive?
Standalone EPS: $1
A needs to issue 6 more shares to finance the deal
Pro forma EPS: 20 of NI / 16 shares = 1.25 per share
accretive
A has NI of 500, 100 shares outstanding at $100 per share
B has NI 300, 100 shares outstanding and share price of 50
All stock deal
Accretive or dilutive?
A’s EPS: $5
EQV = 5000
A needs to issue 50 more shares
Pro forma: 800 / 150 = 6.7
Accretive
Walk me thru a merger model
- Determine the purchase price
- Determine how to finance the puchase (debt cash stock)
- find the goodwill
purchase price - FMV of assets = goodwill - combine the balance sheet, wipe out seller SE
- combine and project three statements, account for synergies and cash used
- find combined NI and calculate EPS
What are the costs of an acquisition?
- cash: forgone interest
- debt: interest payments
- stock: dilution
What is goodwill?
Purchase price - FMV
Reputation, relationships, market share
Why would a company want to acquire another company?
- synergies
- revenue: cross sell, upsell
- cost: reduce opex - strategic
- IP, human talent
- gain market share
- defensive acquisition
Why would an acquisition be dilutive?
The additional NI of the seller is not enough to offset the total cost of acquisition (WACA)
- overpaid
- underperformed
overestimated synergies
synergies take too long to realize
What’s the rule of thumb for assessing if an acquisition will be dilutive?
If it’s an all stock deal, if a low P/E company acquires a high P/E one, it’s dilutive
But if there’s cash and debt, you need to calculate WACA and compare with the seller’s yield (seller P/E)
Are revenue or cost synergies more important?
Rev synergies are usually harder to realize and assumption heavy
Cost synergies are more concrete
Compare the different ways to finance an acquisition
- cash is cheapest because interest rates are low. But cash can be necessary for post merger operations
- debt is cheap. There’s added leveraged and covenants.
- stock is the most expensive. It’s also risky for the seller because the price of stock can change a lot post-acquisition.
What happens when a company overpays for another?
- very high amount of goodwill and intangibles created
- later on, there might be goodwill impairment
What type of sensitivity analyses would you look at in a merger model?
Accretion/dilution for
- purchase price, % stock/cash/debt, rev synergies, cost synergies
How do DTAs and DTLs get created in an M&A setting?
- asset write ups increase D&A and cause DTLs
write-downs, vice versa
What can lead to a deal being dilutive?
- ## negative or low net income
