M&A, Merger Models: Concepts and
Overview
1. Why could one business enterprise need to shop for some other agency? - ANS-One
organization will need to shop for every other organization if it believes it will be better off after
the acquisition takes location. For instance:
• The Seller's asking fee is much less than its Implied Value, i.E. The Present Value of its
destiny cash flows.
• The Buyer's anticipated IRR from the purchase exceeds its WACC. Buyers regularly
accumulate Sellers to shop cash through consolidation and economies of scale, to develop
geographically or gain marketplace share, to gather new clients or distribution channels, and to
amplify their products.
- Deals also are stimulated by using competition, office politics, and ego.
2. How can you examine an M&A deal and determine whether or no longer it makes feel? -
ANS-- The qualitative analysis depends at the factors above: Could the deal help the agency
expand geographies, merchandise, or purchaser bases, deliver it extra highbrow assets, or
enhance its crew?
- The quantitative evaluation would possibly consist of a valuation of the Seller to see if it is
undervalued, in addition to a evaluation of the anticipated IRR to the Buyer's WACC.
- Finally, EPS accretion/dilution may be very critical in most offers because few Buyers need to
execute dilutive offers; buyers focus pretty on near-time period EPS, so dilutive offers tend to
make companies' stock prices decline.
Three. Walk me via a merger version (accretion/dilution evaluation). - ANS-- In a merger
version, you begin by way of projecting the financial statements of the Buyer and Seller. Then,
you estimate the Purchase Price and the mixture of Cash, Debt, and Stock used to fund the
deal. You create a Sources & Uses schedule and Purchase Price Allocation time table to
estimate the proper price of the purchase and its effects.
- Then, you integrate the Balance Sheets of the Buyer and Seller, reflecting the Cash, Debt, and
Stock used, new Goodwill created, and any write-ups. You then integrate the Income
Statements, reflecting the Foregone Interest on Cash, Interest on Debt, and synergies. If Debt
or Cash adjustments over time, your Interest figures must additionally trade.
- Combined Net Income = Combined Pre-Tax Income * (1 - Buyer's Tax Rate)
, - Combined EPS = Combined Net Income / (Buyer's Existing Share Count + New Shares Issued
inside the Deal)
- You calculate the accretion/dilution = (Combined EPS / Buyer's standalone EPS) - 1.
4. Why may an M&A deal be accretive or dilutive? - ANS-A deal is accretive if the more Pre-Tax
Income from a Seller > the value of the purchase inside the shape of Foregone Interest on
Cash, Interest Paid on New Debt, and New Shares Issued.
- Ex) if the Seller contributes $a hundred in Pre-Tax Income, but the deal charges the Buyer
best $70 in Interest Expense, and it doesn't issue any new stocks, the deal might be accretive
because the Buyer's Earnings per Share (EPS) will boom.
A deal may be dilutive if the alternative happens.
- Ex) If the Seller contributes $one hundred in Pre-Tax Income but the deal prices the Buyer
$one hundred thirty in Interest Expense, and its percentage be counted remains the equal, its
EPS will lower.
5. How are you able to inform whether an M&A deal could be accretive or dilutive? - ANS-You
evaluate the Weighted Cost of Acquisition to the Seller's Yield at its purchase fee.
• Cost of Cash = Foregone Interest Rate on Cash * (1 - Buyer's Tax Rate)
• Cost of Debt = Interest Rate on New Debt * (1 - Buyer's Tax Rate)
• Cost of Stock = Reciprocal of the Buyer's P / E multiple, i.E. Net Income / Equity Value.
Weighted Cost of Acquisition = (% Cash Used * Cost of Cash) + (% Debt Used * Cost of Debt) +
(% Stock Used * Cost of Stock)
Seller's Yield = Reciprocal of the Seller's P / E a couple of, calculated the usage of the Purchase
Equity Value.
- If Weighted Cost < the Seller's Yield = the deal will be accretive
- If the Weighted Cost > the Seller's Yield = the deal may be dilutive.
6. Why do you cognizance a lot on EPS in M&A offers? - ANS-- Because it's the handiest
smooth-to-calculate metric that still captures the FULL effect of the deal - the Foregone Interest
on Cash, Interest on New Debt, and New Shares Issued.
- Although metrics inclusive of EBITDA and Unlevered FCF are higher in some approaches,
they don't reflect the deal's complete effect due to the fact they exclude Interest and the effects
of new stocks.
7. How do you decide the Purchase Price in an M&A deal? - ANS-- If the Seller is public, you
anticipate a top rate over the Seller's present day share fee based on common premiums for
Overview
1. Why could one business enterprise need to shop for some other agency? - ANS-One
organization will need to shop for every other organization if it believes it will be better off after
the acquisition takes location. For instance:
• The Seller's asking fee is much less than its Implied Value, i.E. The Present Value of its
destiny cash flows.
• The Buyer's anticipated IRR from the purchase exceeds its WACC. Buyers regularly
accumulate Sellers to shop cash through consolidation and economies of scale, to develop
geographically or gain marketplace share, to gather new clients or distribution channels, and to
amplify their products.
- Deals also are stimulated by using competition, office politics, and ego.
2. How can you examine an M&A deal and determine whether or no longer it makes feel? -
ANS-- The qualitative analysis depends at the factors above: Could the deal help the agency
expand geographies, merchandise, or purchaser bases, deliver it extra highbrow assets, or
enhance its crew?
- The quantitative evaluation would possibly consist of a valuation of the Seller to see if it is
undervalued, in addition to a evaluation of the anticipated IRR to the Buyer's WACC.
- Finally, EPS accretion/dilution may be very critical in most offers because few Buyers need to
execute dilutive offers; buyers focus pretty on near-time period EPS, so dilutive offers tend to
make companies' stock prices decline.
Three. Walk me via a merger version (accretion/dilution evaluation). - ANS-- In a merger
version, you begin by way of projecting the financial statements of the Buyer and Seller. Then,
you estimate the Purchase Price and the mixture of Cash, Debt, and Stock used to fund the
deal. You create a Sources & Uses schedule and Purchase Price Allocation time table to
estimate the proper price of the purchase and its effects.
- Then, you integrate the Balance Sheets of the Buyer and Seller, reflecting the Cash, Debt, and
Stock used, new Goodwill created, and any write-ups. You then integrate the Income
Statements, reflecting the Foregone Interest on Cash, Interest on Debt, and synergies. If Debt
or Cash adjustments over time, your Interest figures must additionally trade.
- Combined Net Income = Combined Pre-Tax Income * (1 - Buyer's Tax Rate)
, - Combined EPS = Combined Net Income / (Buyer's Existing Share Count + New Shares Issued
inside the Deal)
- You calculate the accretion/dilution = (Combined EPS / Buyer's standalone EPS) - 1.
4. Why may an M&A deal be accretive or dilutive? - ANS-A deal is accretive if the more Pre-Tax
Income from a Seller > the value of the purchase inside the shape of Foregone Interest on
Cash, Interest Paid on New Debt, and New Shares Issued.
- Ex) if the Seller contributes $a hundred in Pre-Tax Income, but the deal charges the Buyer
best $70 in Interest Expense, and it doesn't issue any new stocks, the deal might be accretive
because the Buyer's Earnings per Share (EPS) will boom.
A deal may be dilutive if the alternative happens.
- Ex) If the Seller contributes $one hundred in Pre-Tax Income but the deal prices the Buyer
$one hundred thirty in Interest Expense, and its percentage be counted remains the equal, its
EPS will lower.
5. How are you able to inform whether an M&A deal could be accretive or dilutive? - ANS-You
evaluate the Weighted Cost of Acquisition to the Seller's Yield at its purchase fee.
• Cost of Cash = Foregone Interest Rate on Cash * (1 - Buyer's Tax Rate)
• Cost of Debt = Interest Rate on New Debt * (1 - Buyer's Tax Rate)
• Cost of Stock = Reciprocal of the Buyer's P / E multiple, i.E. Net Income / Equity Value.
Weighted Cost of Acquisition = (% Cash Used * Cost of Cash) + (% Debt Used * Cost of Debt) +
(% Stock Used * Cost of Stock)
Seller's Yield = Reciprocal of the Seller's P / E a couple of, calculated the usage of the Purchase
Equity Value.
- If Weighted Cost < the Seller's Yield = the deal will be accretive
- If the Weighted Cost > the Seller's Yield = the deal may be dilutive.
6. Why do you cognizance a lot on EPS in M&A offers? - ANS-- Because it's the handiest
smooth-to-calculate metric that still captures the FULL effect of the deal - the Foregone Interest
on Cash, Interest on New Debt, and New Shares Issued.
- Although metrics inclusive of EBITDA and Unlevered FCF are higher in some approaches,
they don't reflect the deal's complete effect due to the fact they exclude Interest and the effects
of new stocks.
7. How do you decide the Purchase Price in an M&A deal? - ANS-- If the Seller is public, you
anticipate a top rate over the Seller's present day share fee based on common premiums for
