M&A MERGER MODELS QUESTIONS AND ANSWERS

M&A MERGER MODELS QUESTIONS
AND ANSWERS




How44can44you44think44about44calculating44combined44equity44value?44-44answer--
if44no44Stock44is44used,44Combined44Equity44Value44=44Company44A's44Equity44Value.44
If44it's44a44100%44Stock44deal,44Combined44Equity44Value44=44Company44A's44Equity44V
alue44+44Company44B's44Purchase44Equity44Value.

How44can44you44think44about44calculating44combined44enterprise44value?44-44answer--
Combined44Enterprise44Value44=44Acquirer's44Current44Enterprise44Value44+44Seller's44
Purchase44Enterprise44Value
Equal44to44the44Combined44Equity44Value,44plus44the44Debt44(and44other44Debt-
like44Liabilities),44minus44the44Cash44(and44other44non-core-
business44Assets)44of44the44Combined44Company...44including44the44Cash44or44Debt44u
sed44to44fund44the44deal.

Where44will44combined44multiples44roughly44end44up?44-44answer--
The44Combined44Multiples44will44be44in44between44the44Acquirer's44multiples44and44Targ
et's44purchase44multiples.

How44does44purchase44method44effect44combined44Enterprise44Value-
Based44Multiples?44-44answer--
These44will44not44change44regardless44of44the44purchase44method44because44the44Com
bined44Enterprise44Value44isn't44affected44by44the44purchase44method,44and44neither44ar
e44metrics44like44Revenue,44EBIT,44or44EBITDA.

Combined44Equity44Value-Based44Multiples44-44answer--
These44will44change44based44on44the44purchase44method44because44the44Combined44E
quity44Value44changes44based44on44the44amount44of44Stock44used,44and44the44Combine
d44Net44Income44changes44based44on44the44amount44of44Cash44and44Debt44used44and44
the44interest44rates44on44them.

Walk44me44through44a44merger44model44-44answer--
1.)44project44the44financial44statements44of44the44buyer/seller,442.)44estimate44the44purch
ase44price44and44form44of44payment,443.)44create44a44sources44&44uses44schedule44and4
4purchase44price44allocation44schedule,444.)44combine44the44balance44sheet44of44the44bu
yer/seller,445.)44combine44the44income44statements44of44the44buyer/seller,446.)44calculate

, 44cash44flow,44debt44repayment,44and44key44metrics/ratios,447.)44calculate44EPS44accreti
on/dilution44and44create44sensitivity44tables

What44are44the44key44projections44you44need44to44make44for44merger44model44financial4
4statements?44-44answer--
1.)44Revenue,442.)44COGS/Opex,443.)44Net44interest44income,444.)44Taxes/net44income,4
45.)44major44cash44flow44items44(D&A,44working44capital,44dividends)


What44is44the44cost44of44cash?44-44answer--Forgone44cash44interest44*44(1-
buyer44tax44rate)

What44is44cost44debt?44-44answer--
(interest44expense/average44debt44balance44or44its44the44actual44interest44rate44on44new
44debt)44*44(1-buyer44tax44rate)


What44is44cost44of44equity?44-44answer--Net44income44/44equity44value

Why44would44one44company44want44to44buy44another44company?44-44answer--
One44company44will44want44to44buy44another44company44if44it44believes44it44will44be44bet
ter44off44after44the44acquisition44takes44place.44For44example:44
•44The44Seller's44asking44price44is44less44than44its44Implied44Value,44i.e.44the44Present44
Value44of44its44future44cash44flows.
•44The44Buyer's44expected44IRR44from44the44acquisition44exceeds44its44WACC.44
1.)44Consolidation44and44economies44of44scale442.)44grow44geographically44or44gain44m
arket44share,443.)44acquire44new44customers/distribution44channels,44and444.)44expand44
products.44
Deals44are44also44motivated44by44competition,44office44politics,44and44ego.

Walk44me44through44a44merger44model44(accretion/dilution44analysis).44-44answer--
In44a44merger44model,44you44start44by44projecting44the44financial44statements44of44the44B
uyer44and44Seller.44Then,44you44estimate44the44Purchase44Price44and44the44mix44of44Ca
sh,44Debt,44and44Stock44used44to44fund44the44deal.44You44create44a44Sources44&44Uses4
4schedule44and44Purchase44Price44Allocation44schedule44to44estimate44the44true44cost44
of44the44acquisition44and44its44effects.
Then,44you44combine44the44Balance44Sheets44of44the44Buyer44and44Seller,44reflecting44t
he44Cash,44Debt,44and44Stock44used,44new44Goodwill44created,44and44any44write-
ups.44You44then44combine44the44Income44Statements,44reflecting44the44Foregone44Inter
est44on44Cash,44Interest44on44Debt,44and44synergies.44If44Debt44or44Cash44changes44ov
er44time,44your44Interest44figures44should44also44change.
The44Combined44Net44Income44equals44the44Combined44Pre-Tax44Income44times44(144-
44Buyer's44Tax44Rate),44and44to44get44the44Combined44EPS,44you44divide44that44by44the4
4Buyer's44Existing44Share44Count44+44New44Shares44Issued44in44the44Deal.
You44calculate44the44accretion/dilution44by44taking44the44Combined44EPS,44dividing44it44
by44the44Buyer's44standalone44EPS,44and44subtracting441.