M&A Advanced Part II Study Questions
and Correct Answers
What if there are CapEx synergies? For example, what if the buyer can reduce its
CapEx spending because of certain assets the seller owns? ✅In this case, you would
start recording a lower CapEx charge on the combined Cash Flow Statement, and then
reflect a reduced Depreciation charge on the Income Statement from that new CapEx
spending each year.
You would not start seeing the results until Year 2 because reduced Depreciation only
comes after reduced CapEx spending. This scenario would be much easier to model
with a full PP&E schedule where you can adjust the spending and the resulting
Depreciation each year.
What happens when you acquire a 30% stake in a company? Can you still use an
accretion / dilution analysis? ✅You record this 30% as an "Investment in Equity
Interest" or "Associate Company" on the Assets side of the Balance Sheet, and you
reduce Cash to reflect the purchase (assuming that Cash was used). You use this
treatment for all ownership percentages between 20% and 50%.
You can still use an accretion / dilution analysis; just make sure that the new Net
Income reflects the 30% of the other company's Net Income that you are entitled to.
What happens when you acquire a 70% stake in a company? ✅For all acquisitions
where over 50% but less than 100% of another company gets acquired, you still go
through the purchase price allocation process and create Goodwill, but you record a
Noncontrolling Interest on the Liabilities side for the portion you do not own. You also
consolidate 100% of the other company's statements with your own, even if you only
own 70% of it.
Example: You acquire 70% of another company using Cash. The company is worth
$100, and has Assets of $180, Liabilities of $100, and Equity of $80.
You add all of its Assets and Liabilities to your own, but you wipe out its Equity since it's
no longer considered an independent entity. The Assets side is up by $180 and the
Liabilities side is up by $100.
You also used $70 of Cash, so the Assets side is now only up by $110.
We allocate the purchase price here, and since 100% of the company was worth $100
but its Equity was only $80, we create $20 of Goodwill - so the Assets side is up by
$130.
On the Liabilities side, we create a Noncontrolling Interest of $30 to represent the 30%
of the company that we do not own. Both sides are up by $130 and balance.
Let's say that a company sells a subsidiary for $1000, paid for by the buyer in Cash.
The buyer is acquiring $500 of Assets with the deal, but it's assuming no Liabilities.
Assume a 40% tax rate. What happens on the 3 statements after the sale? ✅Income
Statement: We record a Gain of $500, since we sold Balance Sheet Assets of $500 for
, $1,000. That boosts Pre-Tax Income by $500 and Net Income by $300 assuming a 40%
tax rate.
Cash Flow Statement: Net Income is up by $300, but we subtract the Gain of $500 in
the CFO section, so cash flow is down by $200 so far. We add the full amount of sale
proceeds ($1000) in the CFI section, so cash at the bottom is up by $800.
Balance Sheet: Cash on the Assets side is up by $800, but we've lost $500 in Assets,
so the Assets side is up by $300. On the other side, Shareholders' Equity is also up by
$300 due to the increased Net Income.
In this scenario, you'd also have to go back and remove revenue and expenses from
this sold-off division and label them "Discontinued Operations" on the financial
statements prior to the close of the sale.
Now let's say that we decide to buy 100% of another company's subsidiary for $1000 in
cash. This subsidiary has $500 in Assets and $300 in Liabilities, and we are acquiring
all the Assets and assuming all the Liabilities. What happens on the statements
immediately afterward? ✅Income Statement: No changes.
Cash Flow Statement: We record $1000 for "Acquisitions" in the CFI section, so cash at
the bottom is down by $1000.
Balance Sheet: Cash is down by $1000 on the Assets side, but we add in the
subsidiary's Assets of $500, so this side is down by $500 so far. We also create $800
worth of Goodwill because we bought this subsidiary for $1000, but (Assets Minus
Liabilities) was only $200. So the Assets side is up by $300. The other side is up by
$300 because of the assumed Liabilities, so both sides balance.
What's the purpose of calendarization in a merger model? ✅You need to make sure
that the buyer and seller use the same fiscal years post-transaction. Normally you
change the seller's financial statements to match the buyer's.
If the buyer's fiscal year ends on December 31 and the seller's ends on June 30, for
example, you would have to take quarter 3 (Jan - Mar) and quarter 4 (Apr - Jun) from
the seller's most recent fiscal year and then add quarters 1 (Jul - Sep) and 2 (Oct - Dec)
from the seller's current fiscal year to match the buyer's current fiscal year.
The second point here is that you may also need to create a stub period from the date
when the deal closes to the end of the buyer's current fiscal year.
For example, if the deal closes on September 30 but the buyer's fiscal year ends on
December 31, the buyer and seller are still one combined company for that 3-month
period and you need to account for that, normally via a separate "stub period" right
before the start of the first full fiscal year as a combined entity.
Let's say that the buyer's fiscal year ends on December 31, the seller's fiscal year ends
on June 30, and the transaction closes on September 30. How would you create a
merger model for this scenario? ✅You would need to create quarterly financial
statements for both the buyer and sell for the September 30 - December 31 period, and
you would show that as the first "combined" period in the merger model.
So you would combine the Income Statements, Balance Sheets, and Cash Flow
Statements for that 3-month period, and then keep them combined for the rest of the
and Correct Answers
What if there are CapEx synergies? For example, what if the buyer can reduce its
CapEx spending because of certain assets the seller owns? ✅In this case, you would
start recording a lower CapEx charge on the combined Cash Flow Statement, and then
reflect a reduced Depreciation charge on the Income Statement from that new CapEx
spending each year.
You would not start seeing the results until Year 2 because reduced Depreciation only
comes after reduced CapEx spending. This scenario would be much easier to model
with a full PP&E schedule where you can adjust the spending and the resulting
Depreciation each year.
What happens when you acquire a 30% stake in a company? Can you still use an
accretion / dilution analysis? ✅You record this 30% as an "Investment in Equity
Interest" or "Associate Company" on the Assets side of the Balance Sheet, and you
reduce Cash to reflect the purchase (assuming that Cash was used). You use this
treatment for all ownership percentages between 20% and 50%.
You can still use an accretion / dilution analysis; just make sure that the new Net
Income reflects the 30% of the other company's Net Income that you are entitled to.
What happens when you acquire a 70% stake in a company? ✅For all acquisitions
where over 50% but less than 100% of another company gets acquired, you still go
through the purchase price allocation process and create Goodwill, but you record a
Noncontrolling Interest on the Liabilities side for the portion you do not own. You also
consolidate 100% of the other company's statements with your own, even if you only
own 70% of it.
Example: You acquire 70% of another company using Cash. The company is worth
$100, and has Assets of $180, Liabilities of $100, and Equity of $80.
You add all of its Assets and Liabilities to your own, but you wipe out its Equity since it's
no longer considered an independent entity. The Assets side is up by $180 and the
Liabilities side is up by $100.
You also used $70 of Cash, so the Assets side is now only up by $110.
We allocate the purchase price here, and since 100% of the company was worth $100
but its Equity was only $80, we create $20 of Goodwill - so the Assets side is up by
$130.
On the Liabilities side, we create a Noncontrolling Interest of $30 to represent the 30%
of the company that we do not own. Both sides are up by $130 and balance.
Let's say that a company sells a subsidiary for $1000, paid for by the buyer in Cash.
The buyer is acquiring $500 of Assets with the deal, but it's assuming no Liabilities.
Assume a 40% tax rate. What happens on the 3 statements after the sale? ✅Income
Statement: We record a Gain of $500, since we sold Balance Sheet Assets of $500 for
, $1,000. That boosts Pre-Tax Income by $500 and Net Income by $300 assuming a 40%
tax rate.
Cash Flow Statement: Net Income is up by $300, but we subtract the Gain of $500 in
the CFO section, so cash flow is down by $200 so far. We add the full amount of sale
proceeds ($1000) in the CFI section, so cash at the bottom is up by $800.
Balance Sheet: Cash on the Assets side is up by $800, but we've lost $500 in Assets,
so the Assets side is up by $300. On the other side, Shareholders' Equity is also up by
$300 due to the increased Net Income.
In this scenario, you'd also have to go back and remove revenue and expenses from
this sold-off division and label them "Discontinued Operations" on the financial
statements prior to the close of the sale.
Now let's say that we decide to buy 100% of another company's subsidiary for $1000 in
cash. This subsidiary has $500 in Assets and $300 in Liabilities, and we are acquiring
all the Assets and assuming all the Liabilities. What happens on the statements
immediately afterward? ✅Income Statement: No changes.
Cash Flow Statement: We record $1000 for "Acquisitions" in the CFI section, so cash at
the bottom is down by $1000.
Balance Sheet: Cash is down by $1000 on the Assets side, but we add in the
subsidiary's Assets of $500, so this side is down by $500 so far. We also create $800
worth of Goodwill because we bought this subsidiary for $1000, but (Assets Minus
Liabilities) was only $200. So the Assets side is up by $300. The other side is up by
$300 because of the assumed Liabilities, so both sides balance.
What's the purpose of calendarization in a merger model? ✅You need to make sure
that the buyer and seller use the same fiscal years post-transaction. Normally you
change the seller's financial statements to match the buyer's.
If the buyer's fiscal year ends on December 31 and the seller's ends on June 30, for
example, you would have to take quarter 3 (Jan - Mar) and quarter 4 (Apr - Jun) from
the seller's most recent fiscal year and then add quarters 1 (Jul - Sep) and 2 (Oct - Dec)
from the seller's current fiscal year to match the buyer's current fiscal year.
The second point here is that you may also need to create a stub period from the date
when the deal closes to the end of the buyer's current fiscal year.
For example, if the deal closes on September 30 but the buyer's fiscal year ends on
December 31, the buyer and seller are still one combined company for that 3-month
period and you need to account for that, normally via a separate "stub period" right
before the start of the first full fiscal year as a combined entity.
Let's say that the buyer's fiscal year ends on December 31, the seller's fiscal year ends
on June 30, and the transaction closes on September 30. How would you create a
merger model for this scenario? ✅You would need to create quarterly financial
statements for both the buyer and sell for the September 30 - December 31 period, and
you would show that as the first "combined" period in the merger model.
So you would combine the Income Statements, Balance Sheets, and Cash Flow
Statements for that 3-month period, and then keep them combined for the rest of the
