Mergers and Acquisitions

Question 1

Process to buy a company with all stock

Answer 1

Figure out how much is needed to buy the target (prices * shares out)

Figure out how many shares of the acquirer that is. The new number of shares outstanding is (oldSharesOut + sharesCreatedForPurchase)

Question 2

Gains that accrue to the target in a merger

Answer 2

g_target = PT - VT

or as a percent

g_target% = ( PT - VT ) / VT

Question 3

Valuation with DCF

Answer 3

Value the cash flows (will be given or you have to calculate)

Calculate the Terminal Value. A couple ways:

(1) Last Year cash flow * (1+g) / ( r - g )
Then discount back to present
Remember, the number of periods is the period of the last cash flow!

(2) Last Year Cash from * some multiple
Multiple will be given.
Then calculate PV of that

Question 4

Comparables Valuation

Answer 4

Will typically be given:
(a) target’s share price, target’s stats: earnings, book, sales, cash flow.

(b) same for a set of comparables

Procedure:
Calculate the comparable multiple:
Price / stat
Ex: PE = Price / earnings

Avg all the comparables. Then multiply the resulting average ratio times the target price.

Question 5

Which price to use for comparables if both pre-merger and post-merger price are given

Answer 5

Post-merger price!

Question 6

Gains that accrue to the acquirer

Answer 6

g_acquirer = S - P

= S - (PT - VT)

Synergies less the premium paid

Question 7

Value of the Acquirer

Answer 7

V_A = V_A + V_T + S - C