M&A/ Merger Model & LBO
"Company A buys Company B. Company A has a better P/E ratio than Company B. Would the
deal be accretive or dilutive if:" - ANS-"○ The deal is all stock ■ Deal could be accretive ■ Buyer
"receives" more in income for every $1.00 used to accumulate the opposite agency than it does
from its very own operations (take into account P /E = how a great deal traders are inclined to
pay in line with $1 of income) ○ The deal is all debt / all cash ■ P / E more than one of the
customer does not be counted due to the fact no inventory is being issued"
"What are Deferred Tax Liabilities and Deferred Tax Assets? Why do they now and again get
created in M&A transactions?" - ANS-"○ Normally write down maximum of the vendor's current
DTLs and DTAs to "reset" its tax basis, considering it's now a part of another entity ○ May create
new DTLs or DTAs if there are Asset Write-Ups or Write-Downs and the e book and tax
Depreciation and Amortization numbers vary ■ Write-ups → Deferred Tax Liability can be
created in maximum deals since the Depreciation on the write-usais not tax-deductible, because
of this that the business enterprise will pay extra in cash taxes ■ Write-downs → Deferred Tax
Asset could be created (opposite of above applies)"
"What is the combined fairness cost of a organisation if the deal isn't financed with any
inventory?" - ANS-"○ Combined Equity Value = Buyer's Equity Value + Value of Stock Issued in
Deal ○ Thus, if no stock is issued inside the deal, the Combined Equity Value could without a
doubt be the Buyer's Equity Value"
"When might you decide on sales synergies over value synergies, and while would you be
detached? (think about the two sorts of sales synergies)" - ANS-"○ If revenue synergies coming
from cross-selling to new customers, and for that reason selling MORE merchandise, would
decide upon fee synergies ■ Increase in gadgets offered could include an related boom in
COGS, whereas value synergies are found out in isolation ○ If sales synergies coming from
selling identical number of products at higher price (e.G. No associated growth in COGS), might
be indifferent between revenue and fee synergies"
"Why could a organisation purchase every other corporation? How would this reasoning
fluctuate for the two types of buyers?" - ANS-"○ Several reasons ■ Gain market share / develop
quickly ■ Seller is undervalued ■ Acquire dealer's clients ■ Acquire key era / IP from seller ■
Acquire skills from seller ("acquihire") ■ Possibility of full-size revenue / value synergies ○
Generally, monetary sponsors prompted more by returns / IRR as opposed to strategic
shoppers are willing to take larger bets / longer-term view on potential achievement"
three principal drivers of IRR? (should know as a minimum five, however know the primary
three) - ANS-"○ Main 3 ■ Lower purchase rate (reduces coins investment) ■ Larger go out a
couple of (will increase budget obtained) ■ Increased leverage (reduces amount of prematurely
equity required) ○ Others ■ Dividend Recaps (recoup fairness investment) ■ Time body (shorter
= higher, TV of cash) ■ Accelerating the organisation's increase (increase EBITDA / exit a
couple of) ■ Improving margins (boom EBITDA / exit a couple of) ■ Realizing synergies with
different portfolio businesses or rolling in new acquisitions"
, 3 most important financing strategies and why use one over any other? - ANS-"○ Stock, Cash
and Debt ○ Assuming customer has unlimited assets, almost usually prefers cash ■ Cheaper
than debt (IR on coins < five% while IR on debt typically better) ■ Cheaper than stock (most P
/E multiples are in 10-20x variety, which equals a 5-10% "Cost of Stock") ■ Less unstable than
debt (no risk purchaser may additionally default) ■ Less risky than inventory (share charge can
plummet) ○ However, commonly see a mix considering the fact that it could be saving cash for
some thing else or its inventory max be trading at an all-time high (which might imply a higher P
/E multiple and decrease "Cost of Stock")"
Advantages/Disadvantages of Cash - ANS-ADV: Cheap, Quick and Easy DISADV: Seller gets
taxed immediately, no upside for Seller
Advantages/Disadvantages of Debt - ANS-ADV: Cheaper than Stock, Seller has Cash in hand
DISADV: Financing can be pricey and time eating, Seller's taxed, More debt on B/S
Advantages/Disadvantages of Stock - ANS-ADV: Cheap is Stock multiple is high, faster than
raising debt, Seller now not taxed and receives upside DISADV: More hazard to Seller, Lock up
durations, Fixed shares vs. Fee may want to impact seller
Difference between Mergers vs. Acquisitions? - ANS-"○ Merger: corporations are near identical
size ○ Acquisition: purchaser is extensively larger"
Difference in Typical M&A and LBO - ANS-"• LBO expecs to sell in 3-5 years • The "Buyer": In
an LBO, the PE firm continually paperwork a "shell company" to finish the purchase; this might
additionally show up in a regular M&A deal, but the business enterprise ought to end up a direct
subsidiary of the Buyer as well.• Purchase Price: It's based totally on a in keeping
with-percentage premium and the valuation methodologies in each, however in an LBO, you
could additionally remember the purchase charge required to attain a positive IRR or MoM more
than one. • Funding Sources: In M&A deals, Buyers use Cash, Debt, and Stock, but in LBOs,
PE firms can use simplest Cash (Investor Equity) and Debt. And they must use a mixture of
both, or it is no longer a actual LBO. • Financial Statement Projections: In an M&A deal, you
want projections for both the Buyer and the Seller; in an LBO, you project handiest the Seller's
financials. • Synergies: These may be very critical in M&A deals, but they do not rely much in
LBOs except the PE company is combining portfolio groups. • Relevant Analyses: EPS
accretion/dilution subjects lots in M&A offers but is beside the point in LBOs; the same is going
for Contribution Analysis. You'll take a look at Returns Attribution and LBO Valuation Analysis in
LBOs, however no longer in M&A offers."
Different varieties of debt you can increase in an LBO? - ANS-"○ At a excessive-level, bank debt
and high-yield debt ○ At a deeper-stage, ■ Bank debt cut up into exceptional types of "Term
Loans," all of which deliver exceptional predominant repayment terms, interest prices,
covenants, and maturities ■ High-yield debt break up into Senior Notes, Subordinated Notes,
and Mezzanine, which all have exceptional seniorities, interest costs, maturities, covenants, and
more ■ Some debt also has a Payment-in-Kind (PIK) option for hobby, in addition to standard
cash hobby (PIK interest accrues to debt main)"
How do you pick the acquisition multiples and go out multiples in an LBO version? - ANS-For
public groups, normally you count on a share-charge top rate and take a look at the implied
purchase multiple against the valuation methodologies to make certain it is reasonable. For
instance, you would possibly assume a 30% top rate to the agency's proportion price of $10.00,
which means an EV / EBITDA multiple of 10x. For non-public organizations, you decide the
"Company A buys Company B. Company A has a better P/E ratio than Company B. Would the
deal be accretive or dilutive if:" - ANS-"○ The deal is all stock ■ Deal could be accretive ■ Buyer
"receives" more in income for every $1.00 used to accumulate the opposite agency than it does
from its very own operations (take into account P /E = how a great deal traders are inclined to
pay in line with $1 of income) ○ The deal is all debt / all cash ■ P / E more than one of the
customer does not be counted due to the fact no inventory is being issued"
"What are Deferred Tax Liabilities and Deferred Tax Assets? Why do they now and again get
created in M&A transactions?" - ANS-"○ Normally write down maximum of the vendor's current
DTLs and DTAs to "reset" its tax basis, considering it's now a part of another entity ○ May create
new DTLs or DTAs if there are Asset Write-Ups or Write-Downs and the e book and tax
Depreciation and Amortization numbers vary ■ Write-ups → Deferred Tax Liability can be
created in maximum deals since the Depreciation on the write-usais not tax-deductible, because
of this that the business enterprise will pay extra in cash taxes ■ Write-downs → Deferred Tax
Asset could be created (opposite of above applies)"
"What is the combined fairness cost of a organisation if the deal isn't financed with any
inventory?" - ANS-"○ Combined Equity Value = Buyer's Equity Value + Value of Stock Issued in
Deal ○ Thus, if no stock is issued inside the deal, the Combined Equity Value could without a
doubt be the Buyer's Equity Value"
"When might you decide on sales synergies over value synergies, and while would you be
detached? (think about the two sorts of sales synergies)" - ANS-"○ If revenue synergies coming
from cross-selling to new customers, and for that reason selling MORE merchandise, would
decide upon fee synergies ■ Increase in gadgets offered could include an related boom in
COGS, whereas value synergies are found out in isolation ○ If sales synergies coming from
selling identical number of products at higher price (e.G. No associated growth in COGS), might
be indifferent between revenue and fee synergies"
"Why could a organisation purchase every other corporation? How would this reasoning
fluctuate for the two types of buyers?" - ANS-"○ Several reasons ■ Gain market share / develop
quickly ■ Seller is undervalued ■ Acquire dealer's clients ■ Acquire key era / IP from seller ■
Acquire skills from seller ("acquihire") ■ Possibility of full-size revenue / value synergies ○
Generally, monetary sponsors prompted more by returns / IRR as opposed to strategic
shoppers are willing to take larger bets / longer-term view on potential achievement"
three principal drivers of IRR? (should know as a minimum five, however know the primary
three) - ANS-"○ Main 3 ■ Lower purchase rate (reduces coins investment) ■ Larger go out a
couple of (will increase budget obtained) ■ Increased leverage (reduces amount of prematurely
equity required) ○ Others ■ Dividend Recaps (recoup fairness investment) ■ Time body (shorter
= higher, TV of cash) ■ Accelerating the organisation's increase (increase EBITDA / exit a
couple of) ■ Improving margins (boom EBITDA / exit a couple of) ■ Realizing synergies with
different portfolio businesses or rolling in new acquisitions"
, 3 most important financing strategies and why use one over any other? - ANS-"○ Stock, Cash
and Debt ○ Assuming customer has unlimited assets, almost usually prefers cash ■ Cheaper
than debt (IR on coins < five% while IR on debt typically better) ■ Cheaper than stock (most P
/E multiples are in 10-20x variety, which equals a 5-10% "Cost of Stock") ■ Less unstable than
debt (no risk purchaser may additionally default) ■ Less risky than inventory (share charge can
plummet) ○ However, commonly see a mix considering the fact that it could be saving cash for
some thing else or its inventory max be trading at an all-time high (which might imply a higher P
/E multiple and decrease "Cost of Stock")"
Advantages/Disadvantages of Cash - ANS-ADV: Cheap, Quick and Easy DISADV: Seller gets
taxed immediately, no upside for Seller
Advantages/Disadvantages of Debt - ANS-ADV: Cheaper than Stock, Seller has Cash in hand
DISADV: Financing can be pricey and time eating, Seller's taxed, More debt on B/S
Advantages/Disadvantages of Stock - ANS-ADV: Cheap is Stock multiple is high, faster than
raising debt, Seller now not taxed and receives upside DISADV: More hazard to Seller, Lock up
durations, Fixed shares vs. Fee may want to impact seller
Difference between Mergers vs. Acquisitions? - ANS-"○ Merger: corporations are near identical
size ○ Acquisition: purchaser is extensively larger"
Difference in Typical M&A and LBO - ANS-"• LBO expecs to sell in 3-5 years • The "Buyer": In
an LBO, the PE firm continually paperwork a "shell company" to finish the purchase; this might
additionally show up in a regular M&A deal, but the business enterprise ought to end up a direct
subsidiary of the Buyer as well.• Purchase Price: It's based totally on a in keeping
with-percentage premium and the valuation methodologies in each, however in an LBO, you
could additionally remember the purchase charge required to attain a positive IRR or MoM more
than one. • Funding Sources: In M&A deals, Buyers use Cash, Debt, and Stock, but in LBOs,
PE firms can use simplest Cash (Investor Equity) and Debt. And they must use a mixture of
both, or it is no longer a actual LBO. • Financial Statement Projections: In an M&A deal, you
want projections for both the Buyer and the Seller; in an LBO, you project handiest the Seller's
financials. • Synergies: These may be very critical in M&A deals, but they do not rely much in
LBOs except the PE company is combining portfolio groups. • Relevant Analyses: EPS
accretion/dilution subjects lots in M&A offers but is beside the point in LBOs; the same is going
for Contribution Analysis. You'll take a look at Returns Attribution and LBO Valuation Analysis in
LBOs, however no longer in M&A offers."
Different varieties of debt you can increase in an LBO? - ANS-"○ At a excessive-level, bank debt
and high-yield debt ○ At a deeper-stage, ■ Bank debt cut up into exceptional types of "Term
Loans," all of which deliver exceptional predominant repayment terms, interest prices,
covenants, and maturities ■ High-yield debt break up into Senior Notes, Subordinated Notes,
and Mezzanine, which all have exceptional seniorities, interest costs, maturities, covenants, and
more ■ Some debt also has a Payment-in-Kind (PIK) option for hobby, in addition to standard
cash hobby (PIK interest accrues to debt main)"
How do you pick the acquisition multiples and go out multiples in an LBO version? - ANS-For
public groups, normally you count on a share-charge top rate and take a look at the implied
purchase multiple against the valuation methodologies to make certain it is reasonable. For
instance, you would possibly assume a 30% top rate to the agency's proportion price of $10.00,
which means an EV / EBITDA multiple of 10x. For non-public organizations, you decide the
