M&A (Reverse)

Question 1

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 a 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.

Answer 1

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?

Question 2

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.

Answer 2

If company A purchases company B, what will the new balance sheet look like?

Question 3

Recognize that when two companies merge, it is typically to realize the synergies. The synergies must be quanitified in the P&L. Thus, revenue and expense synergies must be accounted for.

Answer 3

What kind of assumptions would you have to make when coming up with a new income statement for the combined company in a merger model?

Question 4

Goodwill is NOT amortized, whereas intangible assets ARE amortized.

Answer 4

What is the difference between Goodwill and other intangible assets?

Question 5

Cash is the cheapest source of capital. However, companies may want to have a significant cash buffer and may not want to use cash to pay for an acquisition. If a company think it’s stock price is inflated, then it can use stock to do so.

Answer 5

All else being equal, how would one company prefer to pay for another?

Question 6

It shows how many shares the acquirees will receive per 1 of their shares

Offer price/acquirers price x % stock contribution

Answer 6

What is an exchange ratio in an M&A transaction?

Question 7

1. Identify the valuation and how the acquisition will be financed (cash vs stock vs debt)
2. Create a projection of income statements for both the buyer and seller from revenues down to Net Income
3. Combine the income statements. This is done by adding each individual line item.
4. Make adjustments as neccessary according to how the acquisition will be financed. Take into account interest, etc.
5. Apply the buyers corporate tax rate to pre tax income and then divide that by the new number of shares outstanding to decide whether the acquisition is accretive or dilutive.

Answer 7

Walk me through the basics of a merger model.

Question 8

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.

Answer 8

What are some defense tactics a company could take to prevent a hostile takeover?

Question 9

This occurs when a company wants to sell itself. There are 4 main steps:

1. The bank will meet with the company to gather the necessary information
2. The bank will create a potential list of buyers and send a memorandum offer to other companies to gauge interest
3. The bank will then narrow down the list to companies that are very interested
4. The bank will work with the company to maximize purchase price and negotiate the deal

Answer 9

What do bankers do during a sell-side M&A deal?

Question 10

There are multiple ways:

1. Lower initial sales price
2. Take out more debt and decrease equity
3. Hold the company for a longer period of time realizing the cash flows from the company

Answer 10

How could a LBO firm increase its returns on a LBO investment?

Question 11

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, in addition to convertible securities and RSUs (especially non-vested RSUs).

Answer 11

What is the difference between shares outstanding and fully diluted shares?

Question 12

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.

Answer 12

What is a divestiture?

Question 13

A fairness opinon is an opinion by the investment bank certifying that the transaction is “fair”.

Answer 13

What is a fairness opinion?

Question 14

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.

Answer 14

What are some reasons two companies would want to merge?

Question 15

A way of taking into account employee stock options, convertible debt, and convertible 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.

Answer 15

What is the Treasury Stock Method?

Question 16

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.

Answer 16

What are the three types of mergers, and what are the benefits of each?

Question 17

This occurs when a company agrees to be paid in stock for an acquisition. This is because the acquiree sees value in the acquisition and believes that it would be worth more than cash in the long run.

Answer 17

What is a stock swap?

Question 18

In short, bankers are hired by a firm to search for companies to acquire.

1. Develop a list of targets
2. Share list with clients and narrow down list
3. conduct due diligence on companies, develop valuations, and then speak with potential companies
4. Negotiate the deals

Answer 18

What do bankers do during a buy-side M&A deal?

Question 19

To pay for an acquisition using cash.

Answer 19

What is a cash offer?

Answer 20

Think of 2 companies that should merge.

Question 21

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.

Answer 21

What is a dividend recapitalization?