M&A Topics & Math Flashcards
What is Purchase Accounting or Purchase Price Allocation? What is it used for?
The write-up of assets and liabilities up to the fair market value. If there’s still a small gap between post- FMV write-ups, you increase your Goodwill for the residual.
What are Net identifiable assets?
= Identifiable Assets - Liabilities - Targets Existing Goodwill - Noncontrolling interest
How would you calculate the excess purchase price in an M&A transaction?
1) Start with purchase price of equity
2) less Net Identifiable assets (assets - targets goodwill - liabilities - noncontrolling interest) OR Common Equity - Targets Goodwill
3) Difference is the Excess purchase price
What is deferred tax liability and why is it created?
= SUM of write-ups * Statutory tax rate
It is not tax-deductible, the write-up creates a D&A expense
Under purchase accounting, what happens to the Target’s Balance Sheet?
Targets Assets & liabilities are ‘written-up’ to fair market value
Provide some examples of BS accounts that are impacted by purchase accounting?
(PPE) (Goodwill) (intangibles) (Deferred Tax Liability) (Shareholders Equity goes away)
What is Goodwill?
The excess in purchase price over Fair Market Value
e.g. Youre buying a company on the BV, however you pay the Market value. Post-asset & liability write-ups may not be enough to get to MV. So you add the residual under Goodwill to allow for Balance sheet parity
What happens to the targets existing Goodwill?
Eliminated
What happens to the targets existing debt?
Assumed/rolled over, or refinanced 1:1
How do you calculate Pro-forma EBITDA?
Add both
How do you calculate Pro-forma debt in the company?
Acquirers + Targets + new debt issues
How do you calculate Proforma ownership? (diluted)
Acquire shares + new shares issued
How do you calculate Proforma EPS
Acquirers Net Income + Targets Net Income +/- after Tax “Incremental Adjustments”/ Acquirers Shares Outstanding + New Shares issues
What are After-tax Incremental adjustments?
What is an M&A Analysis or Merger Consequence Analysis?
The analysis looks at the impact or financial position of the buyer from three points of views
1) The income statement (EPS accretion/dilution)
2) The Balance Sheet (proforma leverage/capitalization)
3) Equity Ownership (proforma ownership)
In addition, it helps determine the price the acquirer is able to pay, and the optimal form of consideration in terms of Cash, Stock, or a combination of the two
What is accretion/ dilution?
The income statement impact an M&A transaction in respect to Earnings Per Share. i.e. is the acquirer better or worse off?
Why buy another company?
0) Economies of scale/ consolidation
1) undervalued
2) Vertical integration
3) take on a bigger market share (take out compeitiers)
4) irrational reasons
Why might an acquierer be inclined to buy a target?
1) asking price is less than its implied value
or
2) the acquirers expected IRR exceeds the discount rate
(SAME THING)
What is a merger model?
Assesses the financial impact of an M&A transaction
What are the accretion/dilution rules?
Weighted Cost of Acquisition < Yield of Seller: Accretive
Weighted Cost of Acquisition = Yield of Seller: Neutral
Weighted Cost of Acquisition > Yield of Seller: Dilutive
What is the weighted cost of the acquisition?
Similar to WACC, except debt, cash, and stock
Cost of Equity = reciprocal of P/E
Cost of Debt = avg rate for companies debt
Cost of cash = similar to rf rate
What is the special rule for 100% stock purchase?
If the PE ratio of the target is larger = DILUTIVE & vice versa
They are not like stocks, infact theyre inversely related.
How do DTL and DTA affect balance sheet adjustments in M&A?
The asset write up or write down is multiplied by the Tax Rate.
What do IBers do in an IPO?
Whats the exchange ratio or swap ratio?
Offer price per share for Target/Acquiers price per share = How many shares will acquierer give up for 1 share of the target
Walk me through important aspects on a Purchase Agreement in an M&A deal
There is a lot but ill name a few:
(purchase price, i.e. per share amount)
(Form of payment)
(Transaction structure i.e. asset, stock, 338(h)(10)
Why may a company want to purchase another?
Besides operational synergies (revenue and cost synergies)
- IRR from acquisition will exceed buyers discount rate
- They are assumed to be undervalued based on the implied value of its future cash flows
- increase market share
- IP
How can you tell whether a deal will be Acr/Dilutive?
If weighted cost of acquision is LESS than the sellers yield it will be ACCRETIVE
Company A with a PE of 25x
Company B w/ PE of 15x
Accretive?
If its all stock, find the recipricol
A = 4%
B = 6%
ACCRETIVE
How would you calculate Equity Purchase Price?
Equity value * (1 + Premium Paid%)
Eq. Value = Diluted * Share price
It is the BARE MINIMUM needed to purchase the target, so the Purchase Enterprise Value is not necessarily the the ‘real price’
What is the Cost of Equity in a M&A Analysis?
BUYERS net income/ BUYERS Equity value
OR the recipricol of the Buyers P/E multiple
How do you calculate shares issues in a 33% stock deal where the Purchase equity value is 600m?
What are the implications based off the stock price?
600m * .33% / Buyers Share price
If the stock price is higher, it will issue less shares
What does the ‘yield’ represent?
How much company A gets in NET INCOME for every dollar it spends to acquire company B
What are the accretive dilutive rules for a deal using cash, stock, and debt?
Sellers Yield > Buyers Cost = ACCRETIVE
Sellers Yield < Buyers Cost = DILUTIVE
What are the accretive dilutive rules for a deal using cash, stock, and debt?
Sellers Yield > Buyers Cost = ACCRETIVE
Sellers Yield < Buyers Cost = DILUTIVE
Whats the rule for all stock deals?
Buyers PE>Sellers PE (at PURCHASE price) = Accretive
Buyers PE
What are the steps in the merger model?
1) find the buyer & sellers financial stats (EqValue & Net Income - tax rates, current share price, shares out, pre-tax income)
2) Determine stock mix & Purchase Equity Price w premium
3) Combine both companies Pre-tax Incomes and adjust for Acqusition affects (cash, debt, stock)
4) Calculate and combine net income & EPS
How do you get combined EPS?
Buyers Shares outstanding + new shares issued. Then divide total Net Income / Shares outstanding to get combined EPS
What makes up the purchase price?
The purchase Equity plus, plus the cost of treatment for the Targets Cash, Debt, and transaction fees
What is Intangibles assets and goodwill? What is the difference?
- identifiable assets, such as contracts, patents, trademarks, customer relationships, and brand value
- Good will is utilized as the gap to mark up assets to FMV after acquiring
How do you calculate Unlevered FCF from NI?
FCF = Net Income + Depreciation & Amortization – CapEx – ΔWorking Capital + Interest Expense (1 – t)
OR FCF = EBIT – (EBIT X T) + D&A – Change in WC – CAPEX
- Can you walk me through the process of a typical sell side M&A deal?
- Meet with company, create initial marketing materials like the Executive Summary and Offering Memorandum (OM), and decide on potential buyers.
- Send out Executive Summary to potential buyers to gauge interest.
- Send NDAs (Non-Disclosure Agreements) to interested buyers along with more detailed information like the Offering Memorandum, and respond to any follow-up due diligence requests from the buyers.
- Set a “bid deadline” and solicit written Indications of Interest (IOIs) from buyers
How do you calculate the New assets purchased in an Accr/dil?
Target market cap/ acquierer share price
How do you find breakeven synergies?
(Combined Net Incomes & adjustments + SYNERGIES) / (old&new shares) = 4.00
How to find target market cap with PE ratio and EPS?
MULTIPLY
How do you find Combined Equity Value?
Acquirers equity value / BV of targets stock issued in deal
Combined enterprise value?
Buyers Enterprise value + Purchase Enterprise value of Target
How do the combined valuation multiples change?
They will be trading between the two buyers current trading multiples and the targets purchase multiples.
Combined Ent value based multiples?
WILL NOT CHANGE
What is IRR in a deal?
The annual returns the buyers makes on the deal
Biggest value drivers in an LBO? Secondary drivers?
- Improving operations
- Delevering
Can you walk me through a sell side deal?
- Meet with company, create initial marketing materials like the Executive Summary and Offering Memorandum (OM), and decide on potential buyers.
- Send out Executive Summary to potential buyers to gauge interest.
- Send NDAs (Non-Disclosure Agreements) to interested buyers along with more detailed information like the Offering Memorandum, and respond to any follow-up due diligence requests from the buyers.
- Set a “bid deadline” and solicit written Indications of Interest (IOIs) from buyers
What are after tax “incremental adjustments” when calculating Pro-Forma EPS?
- after tax synergies
- tax interest expense
- After tax depreciation & Amortization (from write-ups)
What are Net Assets? What are Net identifiable assets?
Assets: Assets - Liabilities
Net Ident: Net Assets - NCI - Targets Existing Goodwil
What happens when you write up Assets from creating Goodwill? How does it affect the statements?
Occurs in an immediate DTL
How do you calculate new shares issues?
Exchange ratio * # target diluted shares
OR
Stock consideration (stock price per share*target diluted) / acquirer share price
How do you calculate after tax cost of new debt issued?
Debt used (cash per share) * targets diluted shares
Multiple by interest rate on debt
How do you calculate breakeven synergies? What is it?
