M&A Modeling Exam
If a target's asking price is less than implied value, this is the same as... - ANSWER
Acquirer's expected IRR from acquisition exceeds WACC
Accretive vs dilutive - ANSWER Transaction that increases EPS vs reduces
Two most important financial criteria - ANSWER Target asking price reasonable
Neutral/accretive
Financial reasons for acquisition - ANSWER - Consolidation/economies of scale
- Geographic expansion
- Gain mkt share
- Seller is undervalued
- Acquire customers or dist. channels
- Tax reductions
- Product expansion/diversification
Fuzzy reasons - ANSWER IP/Patent/Key Tech
- Can't determine exact rev/profit
Defensive Acquisition
- Fast-growing comp --> prevent disruption
Acqui-Hire
- Buy an entire company to hire people
Intangibles
Office Politics, ego
Teaser - ANSWER 5-10 page mkting material to summarize company, financial
profile, why it should be acquired
Prepared by IB for the seller
Selling Process - ANSWER 1. Plan and create mkting material
2. Contact initial set of buyers
3. Set up mgmt meetings/presentations
4. Solicit initial and subsequent bids
5. Conduct final negotiations, arrange financing, close deal
CIM - ANSWER Confidential Information Memorandum
aka Information/Offering Memorandum
- 50 to 100 page, more in depth than Teaser
, IOI, LOI's - ANSWER Indications of Interest/Letters of Interest
- Bids
Buyer submits term sheet w/ proposed purchase price, cash/stock, additional info
Definitive Agreement - ANSWER Exact terms of deal such as price, employee
retention, option treatment
What method of financing do companies prefer - ANSWER 1. Cash - earn nothing
on extra cash, cheaper than debt
2. Debt
3. Equity
2 methods of stock financing - ANSWER 1. Issue new shares to other investors, get
cash, then pay for seller
2. Issue shares to seller in exchange for their shares
Pros & cons of cash - ANSWER - Cheapest
- Seller gets cash immediate
- Quickest
- Seller taxed immediately
- No adv of upside in buyer's stock price
Pros & cons of debt - ANSWER - Cheaper than stock
- Seller gets cash immediate
- Higher debt profile for combined company
- Exp financing & time consuming
- Seller taxed immediately
- No adv of upside in buyer's stock price
- Cheaper IF buyer has high share price and P/E
- Faster than raising debt
- Upside stock price participation
- Seller not taxed until stock sold - ANSWER - Share price could change = risk
- Lock up period for stock = long holding time
Merger vs acq - ANSWER Merger = usually closer in size
- Buyer unlikely to have cash/debt capacity to acquire
- Usually 100% stock/majority stock
Acq = buyer much bigger
Merger model - ANSWER Summarize financial profiles of both sides
List purchase price and financing
Key terms such as interest rates on debt and estimated synergies
If a target's asking price is less than implied value, this is the same as... - ANSWER
Acquirer's expected IRR from acquisition exceeds WACC
Accretive vs dilutive - ANSWER Transaction that increases EPS vs reduces
Two most important financial criteria - ANSWER Target asking price reasonable
Neutral/accretive
Financial reasons for acquisition - ANSWER - Consolidation/economies of scale
- Geographic expansion
- Gain mkt share
- Seller is undervalued
- Acquire customers or dist. channels
- Tax reductions
- Product expansion/diversification
Fuzzy reasons - ANSWER IP/Patent/Key Tech
- Can't determine exact rev/profit
Defensive Acquisition
- Fast-growing comp --> prevent disruption
Acqui-Hire
- Buy an entire company to hire people
Intangibles
Office Politics, ego
Teaser - ANSWER 5-10 page mkting material to summarize company, financial
profile, why it should be acquired
Prepared by IB for the seller
Selling Process - ANSWER 1. Plan and create mkting material
2. Contact initial set of buyers
3. Set up mgmt meetings/presentations
4. Solicit initial and subsequent bids
5. Conduct final negotiations, arrange financing, close deal
CIM - ANSWER Confidential Information Memorandum
aka Information/Offering Memorandum
- 50 to 100 page, more in depth than Teaser
, IOI, LOI's - ANSWER Indications of Interest/Letters of Interest
- Bids
Buyer submits term sheet w/ proposed purchase price, cash/stock, additional info
Definitive Agreement - ANSWER Exact terms of deal such as price, employee
retention, option treatment
What method of financing do companies prefer - ANSWER 1. Cash - earn nothing
on extra cash, cheaper than debt
2. Debt
3. Equity
2 methods of stock financing - ANSWER 1. Issue new shares to other investors, get
cash, then pay for seller
2. Issue shares to seller in exchange for their shares
Pros & cons of cash - ANSWER - Cheapest
- Seller gets cash immediate
- Quickest
- Seller taxed immediately
- No adv of upside in buyer's stock price
Pros & cons of debt - ANSWER - Cheaper than stock
- Seller gets cash immediate
- Higher debt profile for combined company
- Exp financing & time consuming
- Seller taxed immediately
- No adv of upside in buyer's stock price
- Cheaper IF buyer has high share price and P/E
- Faster than raising debt
- Upside stock price participation
- Seller not taxed until stock sold - ANSWER - Share price could change = risk
- Lock up period for stock = long holding time
Merger vs acq - ANSWER Merger = usually closer in size
- Buyer unlikely to have cash/debt capacity to acquire
- Usually 100% stock/majority stock
Acq = buyer much bigger
Merger model - ANSWER Summarize financial profiles of both sides
List purchase price and financing
Key terms such as interest rates on debt and estimated synergies
