M&A questions

Question 1

Walk me through the process of M&A

Answer 1

• initial contact and fire side chat - pitching
  
  • preliminary valuation and analysis (NDA, preliminary due diligence), investment memo
  • Negotiation key terms
  • bidding process
• Due diligence
• Binding offers
• Deal structuring and financing
• Final negotiations and third party approvals
• Closing deal
• Post merger integration

Question 2

walk me through a M&A model

Answer 2

1. assumptions of purchase price, andother uses of fund: refinancing debt, paying transaction fees
2. assumptions of sources of funding: cash, issue debt, issue equity of combination of both
3. adjust acquier’s balance sheet to reflect integration of target. Add working capital tgt. Calculating goodwill created.
4. income statement combined, accretive or dilutive

Question 3

if an all stock deal, how would you determine if its accretive or dilutive

Answer 3

buyer has bigger P/E = accretive

Question 4

what are the effects of an acquisition

Answer 4

5 changes
1. foregone interest in cash
2. additional interest in debt - if it uses debt for the deal
3. additional shares out standing if it is a stock deal
4. combined financial statements
5. creation of goodwill and intangibles: premium paid, IP, patents

Question 4

All else being equal, which method would a company prefer to use when acquiring another company – cash, stock, or debt?

Answer 4

1. cash is cheaper, interest on cash is lower than debt, so forgon interest on cash is lower than debt
2. cost of debt is lower than cost of equity.
3. stocks may be volatile and fluctuate

Question 4

What is the difference between Goodwill and Other Intangible Assets?

Answer 4

1. goodwill not amortized
2. patent and IP is amortized

Question 4

If a company were capable of paying 100% in cash for another company, why would it choose NOT to do so?

Answer 4

1. low on cash
2. cash needs to b e used elsewhere such as operational cash
3. low cost of debt financing
4. stocks are high

Question 4

Why do Goodwill & Other Intangibles get created in an acquisition?

Answer 4

1. premiums paid
2. intangibles like brand name, IP, patent