Real World Scenarios

Question 1

Let’s say a company overpays for another company - what happens afterward?

Answer 1

A high amount of goodwill and OI would be created, and then over time record large goodwill impairment charge.

Question 2

A buyer pays $100 million for the seller in an all-stock deal, but a day later the market decides that it’s only worth $50 million. What happens?

Answer 2

buyer’s share price would fall by whatever per-share dollar amount corresponds to the $50 million loss in value. It would not necessarily be cut in half

Question 3

Why do most mergers and acquisitions fail?

Answer 3

• very difficult to acquire and integrate a different company
• CEO’s massive ego or pressure from shareholders

Question 4

What role does a merger model play in deal negotiations.

Answer 4

• sanity check
• test various assumption
• supporting evidence

Question 5

What types of sensitivities would you look at in a merger model? What variables would you analyze

Answer 5

• purchase price, % stock/ cash/ debt, revenue synergies and expense
• sensitivity tables showing EPS accretion/ dilution at different ranges

Question 6

If the seller has existing Debt on its Balance Sheet in an M&A deal, how do you deal with it?

Answer 6

• assume debt either stays on the BS or is refinanced in the acquisition
• usually terms state they must be repaid in a change of control