M&A

Can you describe how deferred revenue might be adjusted in a merger model?

(OLD) Often, the buyer then writes down the deferred revenue to reflect that obligations won't entirely be recognized as revenue under the combined entity. So, when it is actually recorded as revenue, it is written down to fair value - only how much it cost to perform the good/service + a small profit margin (NEW) Not written down, carried over from book value (thanks to ASU 2021-08)

Stock vs Asset vs 338h(10) purchase

FUNCTION: Stock - Buy whole company (all assets & liabilities) Asset - Can choose what to buy (generally leads to a higher price) 338h(10) - Buys whole company TAX: Stock - Best for seller, as buyer cannot get tax savings even if an asset on the seller is written up (re-priced at a higher valuation) Asset - Best for buyer, as they can properly record the asset and get tax savings (seller must pay increased taxes on the asset write-up). Used when seller = distressed. NOLs are not carried forward. 13bh - Best of both - works like a stock (so seller sells whole company - its taxed twice however but NOLS don't carry over & are used to offset any gains the seller gets from proceeds of company), but the buyer is taxed like asset so asset write-ups will lead to depreciation.

What are break-even synergies? How are they calculated and what are they used for?

Break-even synergies is how much a buyer needs in synergies to be EPS neutral (neither dilutive or accretive). Straightforward to solving - just find how much you need for the eventual EPS of new company to be same as original EPS of buyer

A company announces it will acquire another for $80/share. Why might the company (immediately after the announcement) not trade at $80/share?

Time value Execution risk (SEC blocking it due to antitrust, etc.) Market volatility & inherent risk of business (eg: sinkhole that destroyed a company's HQ led to a cancellation)

What does a sources & uses schedule look like in an M&A transaction?

Sources: New debt tranches, equity contribution, target cash, rollover equity Uses: Equity purchase price, debt payoff, transaction/financing fees, balance sheet cash, working capital adjustments

What are 2 ways an acquisition can create value (not accretion necessarily) for acquirers’ shareholders?

1) "Value Arbitrage" (purchase price > NAV) 2) Synergies

Imagine this scenario: A company worth $1.8B using 50% debt/equity. Over 5 years 450M cash flow paid, then exited. What does this sound like? What type of buyer? Why?

Financial, as it has a defined period, has an exit, and uses high amounts of leverage to finance the deal

**In an acquisition involving a low-risk acquirer & a high-risk target, whose WACC should be used to discount the target’s cash flows?

Use the target’s WACC, as discount rate should reflect risk of the cash flows associate If acquirer’s lower cost of capital is applied post-acquisition, however, acquirer’s WACC should be used on synergies

In an M&A transaction, would an all-stock or all-cash deal fetch a higher premium? Why?

All-stock, as stock consideration allows seller to offload some risk to buyer (who now is stakeholder & bears downside if fails). May also signal that the buyer's stock is overvalued, leading the target to demand more of a premium to compensate Cash = all risk on buyer (so makes them more disciplined in valuation) & is not subject to valuations, and thus commands a lower premium.

What are considerations for the target in terms of receiving cash or stock in an M&A transaction?

Stock: Market Vol of acquirer (esp in current market - frothy) Expected performance of acquirer Deferred/current taxation Upside Participation Cash: Less volatile (not dependent on buyer’s future performance) Directly gets the upside Directly taxed

What are considerations for the buyer to finance using cash, stock, or debt in an M&A transaction? When is it best to use each, respectively?

Stock = conserves cash, avoids leverage, shares risk but dilutes shareholder interests (best if management believes the stock overvalued, making the financing comparably "cheaper") - Bad when capital market conditions are poor & management believes the acquirer's stock is undervalued Cash = when lots of excess cash, and the interest earned is not high - Bad when you don't have enough cash or buffer for normal operating conditions Debt = best when company has the debt capacity & capital markets are have enough capacity to lend to them. Note that it doesn't just have to be EBITDA based - can also be asset-backed or convertible - Bad when company is already overlevered or the debt market conditions are generally poor

What is the difference between cost synergies and revenue synergies, and which are easier to achieve?

Cost synergies involve reducing expenses (e.g., eliminating duplicate headcount, consolidating overlapping facilities) and are generally easier to realize. Revenue synergies involve cross-selling or expanding distribution channels to increase sales. They are harder to achieve due to unpredictable customer behavior.

Why is EPS a key metric in M&A deals?

EPS accretion/dilution is key because it indicates the immediate impact on shareholder value. Accretive deals, where post-acquisition EPS increases, generally boost investor sentiment and stock price, whereas dilutive deals the opposite. Outside of being a focus for shareholders & it often a key signal of value & future performance for investors, management of strategic buyers are incentivized to increase EPS (as compensation packages are oft tied to EPS).

How do you think about short-term accretion/dilution vs long-term synergies? Would you ever buy a dilutive deal?

Short-term = accretive/dilutive to EPS, often driven by relative P/E, or yield of target vs cost of financing Long-term = may appear dilutive short-term but can create long-term value via revenue/cost synergies spread over time Companies still buy dilutive deals if long-term synergies outweigh immediate EPS dilution

Company A & B have revenues of $100. Combined, however, their revenue is $220 pre-synergies. How is that possible?

Primarily = error with the premise (timing or currency). What do you mean by revenue? LTM or previous fiscal year? The most obvious is if they're using fiscal year vs LTM (or if their fiscal year = different calendars, and bringing forward to the buyer's fiscal year means heightened revenue If it is an overseas company, perhaps the exchange rate, if there is a disparity between when it was reported and current rates

Let's say you want to sell a part of your company instead of the whole company. What are the ways you can do that? How are they different & what are the pros/cons?

2 main ways - spinoff and divesture. Spinoff = tax-free, no buyer, unlocks shareholders value & allows you to retain exposure to the child company. Although can’t readily convert to cash, if capital market conditions are good, can be good - Less premium paid & is reliant on capital markets (plus slow) Divestiture = immediate cash, faster execution, cleaner break & can get premium if it's to a competitor - Tax, execution risk & generally sold to a more direct competitor Generally your choice depends on how fast you want cash, if you want share in the old company, and on capital market conditions

Currently your company is extremely overlevered at a 3x Debt/EBITDA ratio. How can an M&A deal actually lower this ratio? What companies would you be looking for?

In general, you'd want to increase EBITDA (as a %) more than you increase debt (or just decrease debt as a % more than you decrease EBITDA). If you buy a company with a lower leverage ratio & finance it with stock issuance or cash, that could be good. You could also try to boost EBITDA by buying a company with high EBTIDA, high expected EBITDA synergies To lower the debt balance you could also use earn-outs/other incentives to lower the purchase price and divest assets post-acquisition to lower debt-financed purchase

What is the difference between a merger & an acquisition?

True merger = lower control premiums/share more equally between parties Often stock-for-stock at fixed exchange ratio Acquisition, full premium paid by buyer for control (often 20-40%) Can be cash, stock, or mixed (with premium explicitly paid)

What are the different considerations often included in an M&A merger (stock and otherwise)

Stock terms: 1) Floating (fixed value) 2) Fixed Exchange Ratio 3) Collar (floating but there's a cap for the exchange rate) Other considerations: 1) Walk-away rights 2) Cash election/mixed rights (pure-cash buyout or stock & cash) 3) CVRs (contingent value rights, like an earn-out)

Let's say an acquisition is agreed to be at a fixed exchange ratio. Suddenly, the acquirer's stock price shoots up. Is this good or bad for the acquirer?

Fixed exchange means that the exchange ratio is already set, so the acquirer already plans to give up a set amount of shares. If those shares suddenly rise in value, that would be bad for the acquirer, who is suddenly giving up more in value.

How do you determine whether or not a deal destroys/creates value? How can it look/be accretive but destroy value?

IN GENERAL: Destroys value if the premium paid > synergy amount (as the combined is worth less than actual amount paid for combined entity) Can arise if the consolidated revenue declines & is less than the revenues separately, or if there are hidden liabilities. Most importantly, if the target’s P/E is lower than buyer, it might seem accretive (but if the target’s value declines, still having a P/E lower than buyer, combined < total of each individually so would destroy value

A luxury soap brand manufactures in-house in the US and sell to big-box, via Amazon and DTC. How would you position this company for sale? Who is your ideal strategic buyer?

Position this company as a prime diversifier - with strong demand from all different selling channels, the company has a de-risked revenue base. The DTC = valuable insights & customer base for any strategic buyer. Domestic manufacturing capability = supply chain advantage. Being a premium brand, it has pricing power in the luxury care segment envied by other brands Strategic buyer = generally horizontal integrators (or like a semi-vertical integration in the big-box retailer space -> I say semi since these big-box now often on their own soap brands and might be looking to expand their wellness products) 3 main types: 1) CPG companies looking for expand their premium/luxury portfolios (P&G, L’Oreal, Unilever) 2) Mid-Market Beauty backed by P/E rolling up their brands 3) Retailer looking for vertical integration into private-label luxury goods

Company A ($10M equity value) buys company B for X amount. If it raises $5M in equity value from a P/E firm, what is its ownership split if it used 100% cash vs 50/50 cash & debt to buy?

The same (2/3 ownership as it gave up $5M equity by raising money from a P/E firm) - is a trick question. The funding type for acquisition doesn’t matter, as that only affects leverage, not equity value (instead equity value is affected by amount the P/E firm pays)

What can you do if you can only offer stock in an M&A deal but the target’s owners don’t want it? FOLLOW-UP: What are some risks associated with that method?

You can issue more shares to raise capital. Risk = not favorable markets/capital raise terms, so stock price drops as a result

What is a “Working Capital Peg”? Do buyers want a higher or lower working capital peg? What about the seller?

Working Capital Peg = ensures the business can still run after it is acquired. Without the peg the seller could manipulate NWC (extract receivables aggressively). Peg ensures business with adequate NWC (& can operate normally as a result) from day 1 Seller = lower working capital peg, as they can extract as much cash as they can before a buyer takes it over. Buyer = higher, as that means more current assets at no extra cost beyond purchase price

Would you add a target company’s NI to your EBITDA? Why or why not?

Generally, no, as net income is an after-tax representation of profitability, while EBITDA represents the earnings before interest, tax, and depreciation. Instead, you should compare and merge line items individually, including revenue and operating expenses

What does it mean for an acquisition to be ‘accretive’?

It means that the value the company brings is more than the acquisition cost. This can be quantified in two ways: 1) EPS - if the earnings per share is greater than before, that means shareholder value is created due to the acquisition. 2) Comparing Yield & WACC - the yield is how much the investment will return, while the WACC represents the cost of financing it

How would you advise a client planning on selling their business if a buyer approaches, offering to buy it for $2B?

1)Assess fair value 2) Understand buyer’s motivation (analyze past deals and the motivations behind it) 3) Create competitive tension (send CIMs & ask for LOIs from interested parties) 4) Evaluate deal terms (management presentations, solicit terms sheets & final bids) 5) Consider Alternatives 6) Advise the board (present recommendation & let the board decide) Basically the sell-side process (except a bit more detailed and focused on the beginning)

Besides the IS and BS, what else would you ask for to evaluate an acquistion?

Cash flow statement Performance for past X years Short bio on the management team Deal terms, including asking price and type of finance & debt schedule (with covenants, maturities, change-of-control provisions) Comparison to other deals in the space (if there are any) --------------------- Management projections & model with assumptions Customer & revenue breakdown Industry & competitive landscape analysis Due diligence reports Tax structure Off-balance sheet obligations (operating leases, litigation, pension obligations)

What key sections would you include in a pitchbook to sellers?

1) Executive summary 2) Strategic rational 3) Target overview (company product, history, customer, strategy) 4) Industry analysis 5) Valuation analysis 6) Historical/Projected Financials 7) Accretion/Dilution 8) Transaction Structure 9) Risk Factors If pitching to a prospective client, also include: 1) Potential buyers & rationale 2) Process & Timing 3) Transaction Credentials 4) Bank Credentials

Why would 2 companies choose to enter into a joint venture (7 reasons)?

Collaborate while maintaining independence Risk-sharing (so not offloading heavy amounts of risk to one party) Complementary Capabilities Market Entry Resource Pooling Strategic Testing Regulatory Considerations

What types of synergies (3) exist in M&A transactions? Please give examples of each type.

Revenue: Cross-selling, geographic expansion, new product lines Cost: shared overhead, reduced headcount, consolidated facilities Financial: better debt terms from a stronger balance sheet

Why might governments seek to deter/block inter-company M&A transactions (7)?

Antitrust Market concentration National Security Consumer protection Systemic Risk Labor Market impact Data privacy

Why would a company want to sell/divest a part of its business?

May lead to a higher valuation Simplifies operational complexity Focus on core business (both from management & operational perspective) Leads to a cash infusion Strategic Flexibility Can improve margins (especially if the division is failing or capital-intensive)

(open) What 2 companies would you merge now and why?

Answer using a structured framework detailing strategic fit, synergies, and financing. Example: Disney acquiring Electronic Arts (EA). 1) Strategic Rationale: Disney possesses world-class IP (Marvel, Star Wars) but lacks robust in-house gaming capabilities; EA brings proven game engines, live-services expertise, and distribution channels. 2) Revenue Synergies: Monetize Disney IP in-house instead of licensing, cross-sell subscriptions (Disney+ and EA Play), and execute joint marketing campaigns. 3) Cost Synergies: Eliminate third-party IP licensing fees, cut duplicate corporate overhead, and optimize customer acquisition costs.

A deal looks too accretive. What might you adjust in the assumptions to shift the EPS downwards?

Assume a higher purchase price, lower revenue projections, and/or decrease synergy estimates

A deal looks too dilutive for a buyer. What might a buyer do to try to boost EPS?

Pay more with cheaper financing methods (cash/stock) & edit the capital structure Negotiate a lower purchase price Assume/realize more synergies

Assume you are speaking to a client. Explain why buying a company with a higher P/E is dilutive to shareholders (assume all-stock)

An M&A deal is dilutive to shareholders if expected yield of the company you buy is less than the cost to finance/pay for the deal. So, if you pay per $ per earnings, and that amount you pay is less than the return you yield from the acquired client, your cost to finance would be higher than the worth, leading to a dilutive transaction

Is it problematic if an overvalued company buys another overvalued company (since deal currency is the same)?

Using overvalued shares as deal currency lowers the effective price as each share issued is worth more than it is truly worth. Thus, it is not problematic if your shares are more overvalued than the target company's

How would you distribute synergies?

Shared via acquisition premium -> seller retains a portion upfront via premium & buyer retains remaining as incremental value post-close Note: Seller typically captures 25-50% of premiums Banker wants to run a synergy analysis & compare the premium paid to the present value of synergies to advise the client on whether or not the deal creates value

What is a fairness opinion? What is included in it?

Letter from independent financial advisor to a company’s board stating whether or not the transaction is fair from a financial point of view. Unbiased valuation of the target -> helps a bank maintain its fiduciary duty to not mislead shareholders Includes: - Range of valuations based on the analyses performed - Assumptions, limitations, and qualifications (what it relied on) - Advisors’ conclusion on whether or not price is fair

Walk me through a merger model and tell me how you determine whether or not it is accretive/dilutive

1) Project statements separately 2) Combine statements, account for synergies, one-time write-downs, and other considerations 3) Calculate purchase price and calculate interest expense/lost interest income/new share count if using stock --------------------------------------------------- (more detailed) Start with standalone EPS Determine purchase price & financing type Calculate lost cash/new interest expense on debt Pro Forma NI Pro Forma EPS (based on new diluted share count). If Pro Forma > Standalone, accretive Calculate EPS before and after to see if accretive/dilutive

What should a company consider when decided whether to pursue M&A now or 6 months down the line (6-8)?

Market conditions: Are valuations favorable now? Could multiples change? Interest Rate Environment: Financing costs may rise/fall Regulatory Landscape - antitrust/industry regulations Competitive dynamics - are other buyers looking? Target’s performance trajectory - is target’s valuation likely to increase/decrease? Integration readiness - does acquirer have bandwidth to integrate? Stock price - if paying with stock, is acquirer’s share price at a favorable level? Strategic urgency - how critical is the acquisition to company’s strategic plan?

What does it mean for a deal to be accretive/dilutive? What is the basic calculation to determine this?

Accretive means that the price shareholders pay is less than the earnings contribution of that company. It is generally found with EPS and seeing how it changes pre and post-acquisition. The basic way to determine this is by seeing the % change pre & post (if positive - accretive, negative - dilutive)

What is the difference between a strategic & financial buyer from a reasoning standpoint? What would be the reason a strategic & financial buyer would want to buy a target company?

Strategic buys it to improve operations, for possible revenue/cost synergies. Evaluates on accretion/dilution to EPS & strategic fit. - Can justify it with many reasons (9 reasons - another question: the list includes geographic expansion, market dominance, etc.) Financial: targets a certain IRR, using leverage to expand its returns (demands a certain IRR, unlike strategic). Acquiring to generate return on invested equity. Will take on debt to amplify returns. Evaluates on ability to grow EBITDA and the IRR, MOIC

What are the pro/cons of selling to a strategic vs financial buyer? Which do owners prefer (if they want the most amount of money possible)? As a banker, which would you want to sell to?

Strategic: CONS: - Leads to confidential info being shared to competitors, slower execution, regulatory risks + integration risk & potential job losses - Less certain than a financial buyer PROS: Higher valuation, no financing risk (direct balance sheet financing) Financial: PROS: Faster, less deal risk, less regulatory scrutiny (no antitrust concerns), confidential CONS: Lower purchase price, financing contingency risk (small) Owners often prefer strategic for the higher control premium paid arising from synergistic justifications. As a banker, it'd depend. Strategic brings more complexity, so often higher deal fees, but building a relationship with financial buyers may mean more deals in the future.

Which can offer more in an acquisition between a strategic & a financial buyer?

Strategic buyer, as it can realize synergies & doesn't have an IRR it must target. NOTE: Financial needs existing management to run the company, which may lead to attractive executive compensation packages (strategic just integrates & manages it themselves) EXCEPTION: Financial sponsor may pay more in competitive auctions if they have a strong proprietary angle, a portfolio company that creates synergies, or use more aggressive leverage assumptions

What are the key factors that impact the accretion/dilution of a transaction (4.5-6 factors)?

(accretion) Purchase price cost & type of financing (relative valuations if stock) Synergy amount other one-time transaction & integration fees (dilution) Dis-synergy (customer attrition, key employees leaving, cultural clashes, distraction of management, loss of favorable supplier terms, overlapping products cannibalizing sales, integration expense & regulatory costs) Integration fees & restructuring charges (as stated above) Financing structure charges

What makes a company a good acquisition candidate for a strategic buyer (10 total)?

Many reasons (5) it could be, including: 1) Geographic expansion/product diversification (has a market/customer base they want to tap into) - Increases TAM, enter new regions, reduces concentration/risk, enables cross-sell 2) Market dominance (increase market share) & tap into a top 2 position 3) Vertical integration 4) Reduce Taxes 5) Undervalued Seller 6) Economics of scale FAKE REASONS (4): 1) Acqui-hire 2) patent 3) ego 4) Defensive move to pre-empt competitors (if developing a quickly competing product)

Why do companies do mergers?

Same as "what makes a company a good acquisition candidate" including: 1) Geographic expansion/product diversification (has a market/customer base they want to tap into) - Increases TAM, enter new regions, reduces concentration/risk, enables cross-sell 2) Market dominance (increase market share) & tap into a top 2 position 3) Vertical integration 4) Reduce Taxes 5) Undervalued Seller 6) Economics of scale FAKE REASONS (4): 1) Acqui-hire 2) patent 3) ego 4) Defensive move to pre-empt competitors (if developing a quickly competing product)

Walk me through the sell-side M&A process, including key documents (8 steps)

Plan process - preparing legal due diligence, create a teaser (1-2 page doc) & CIM - Talk about competitive positioning -> emphasize brand & customer rep Marketing - Distribute CIM after signing NDA. Send teasers to prospective buyers - Analyze CapEx REQ, Historical/projected cash flows, working capital trends Initial Bids - LOIs, evaluate bids on price + certainty of closing Management Presentations - Meets management, sees data room Final Bids - Submit LOIs/purchase agreement drafts - Normalized cash flows, QoE, sustainable CapEx, working cap, FCF normalization Negotiations - Finalize purchase agreement, negotiate reps/warranties Signing - Execute a definitive purchase agreement Closing - Obtain regulatory approval, fund transaction

You’re representing a US coffee producer trying to sell your company. What buyers are you looking for (4 categories)?

1) Strategic (diff industry -> downstream or upstream so if coffee mug, drinkware/drink company) 2) PE (same industry -> consumer for coffee) 3) International (looking to US market entry/distribution) 4) Competitors (looking to consolidate)

How do you quantitatively determine that an acquisition is successful or not (value destruction + EPS accretion/dilution - 6 ways)?

EPS accretion/dilution -> did the deal bring value to shareholders Stock price performance (share holders like or don’t like deal -> show value destruction or not) Synergy realization ROIC vs WACC (did the return on invested capital exceed the company’s WACC) Revenue & Margin Trends (achieve better margins/growth than standalone projections?) Customer & Employee Retention (high attrition signals value destruction)

What are key line items should you adjust after making an acquisition?

Adjust to reflect 1) how the deal is paid for in balance sheet (so new debt/reduction in cash) 2) revalued assets (and its resulting DTA/DTL, goodwill) 3) NCI if <100%, financing/transaction fees 4) working capital changes

How do you quantitatively determine that an acquisition is successful or not (from a value destruction/creation & accretion/dilution perspective)?

EPS accretion/dilution -> did the deal bring value to shareholders Stock price performance (share holders like or don’t like deal -> show value destruction or not) Synergy realization ROIC vs WACC (did the return on invested capital exceed the general cost of financing the investment) Revenue & Margin Trends (achieve better margins/growth than standalone projections?) Customer & Employee Retention (high attrition signals value destruction)

What actually is goodwill? How is it derived/calculated in a M&A deal?

Price paid above the fair net value of the assets - it is calculated by finding the difference between the net asset value of the target & the price paid by the acquirer for the target

How do you model financing fees, transaction fees, and integration costs in a merger model?

Transaction fees are directly expensed & affect the combined entity’s retained earnings Financing fees are generally capitalized and depreciated over a given period of time Integration costs are generally treated either as a separate line item or as non-recurring & directly affects synergy benefits

What does a sensitivity table for an M&A transaction look like?

Model a range of outcomes for certain factors like synergies & integration costs and then see the EPS accretion/dilution under each scenario

If a buyer is projecting to sell off a portion of the seller’s business later, how do you incorporate this?

Might treat that portion as a discontinued operation or build in an assumed divesture gain/loss at the projected time

Why might a buyer recast a seller’s statements before merging them?

Recasting = reworking, making sure that the non-recurring items are adjusted & the accounting policies match the buyers Ensures more accurate projections on EPS impact

When would $100M of revenue synergies go straight into EBITDA?

If there’s no incremental cost (price lift). For example, in like software companies (if just buying another software with no R&D or maintenance cost)

How would you determine how much a company should raise in debt in an M&A setting?

Depends on the leverage/coverage ratios (debt/EBITDA, EBITDA/interest) - rarely exceeds 5-6x, so would cap it if a company seems too overlevered

What is contribution analysis?

Primarily used in MOE - determines how much each company is contributing to bottom line, often used for determining who gets what % ownership.

A classmate argues that foregone interest on cash should not reduce combined pre-tax income. Why is that wrong?

Combined pre-tax income is built by adding projected pre-tax incomes, which includes interest income from each expected to earn on its cash. Without the adjustment the model pretends buyers still earns interest on cash it doesn’t have

What is a bargain purchase gain? When it happens, how does it show up on the 3 statements?

Acquirer buys a target for less than the identifiable net assets of the seller. It is recognized as a one-time, non-operating gain on the income statement

How do NOLs work in an asset vs stock purchase?

NOLs cannot be incorporate an asset purchase In stock purchase use Section 382 (highest adjusted rate in last 3 months * purchase price = amount). Note that, contrary to popular belief, NOLs do not expire (unless they were before 2018, then it’s 20 years since the asset was created)

Please explain how a DTL vs DTA works, please (then how they apply in merger models).

If cash > book taxes, that’s a DTA, if book > cash taxes, that’s a DTL If I write up an asset in M&A, that will lead to a DTL because you’re recognizing a tax expense that doesn’t actually exist If I do straight-line depreciation, it will also be DTL because you’re recognizing more in tax expenses than you’re supposed to currently (so then when you add it back you get less tax savings in the form of operating cash flow) It represents a liability becasue in the future you will get more tax savings represented in the book than in your cash taxes Liability = future cash taxes exceeds future book taxes, or if current book taxes are greater than current cash taxes (current reported operating income is greater than actual income) Occurs due to timing differences. DTA = NOLs (limited due to section 382), DTL = asset write-ups in purchase accounting (don’t say it but obv implying it’s a stock sale)

How does writing up an asset affect the 3 statements?

The write-up means that OCI increases (other comprehensive income, net income) Then a same-year deferred tax expense that makes the value go down Being stupid again - the amount that is written up * tax rate = the DTL (is basically how

A buyer acquires a seller in a stock purchase for a purchase price of $1.5B. The seller has 800M of common shareholders’ equity and no existing goodwill. Buyer writes up PP&E and other intangibles by $200M and agrees to an earn-out of $100M (recorded as contingent consideration). Given a tax rate of 25%, how much goodwill is created?

So goodwill represents purchase price over the sellers’ net asset value. So given 800M represent current net asset value + $200M write-up, the current worth is $1B. Given a 25% tax rate, 25% of the write-up, $50M, is a DTL and thus becomes goodwill. Finally, $100M in earn-out is added to the purchase price. Thus, $1.5B-$1B+100M+50M means that $650M of goodwill created

Company A: 600M EV, 500M Equity Value, 60M EBITDA, 30M NI Company B: 200M EV, 200M Equity Value, 25M EBITDA, 10M NI A buys B using 100% debt at 10% interest, at a 40% tax rate. What are the new EV/EBITDA and P/E multiples?

P/E of this is (Equity Value of A)/Combined NI, so 500M (since all debt)/(40M-interest expense). 500/(40-60%*200*10) = 500/(40-12) = 17.857x

How does writing up an asset affect the 3 statements?

The write-up means that D&A increases. Then a same-year deferred tax liability of Tax rate * D&A means that cash flow stays the same. BS: Assets: The asset write-up amount & Goodwill L&E: Deferred Tax Liability & decrease in retained earnings

What are gross NOLs vs NOL portions of DTAs?

Gross NOLs is obviously just how much you can write off in taxable income in future year. This is an off-balance sheet item You write it as a DTA (“NOL Portion of the DTA”) to show how much cash you’re saving. This is an on-the-balance sheet item In the M&A deal, you will just write down the DTA to how much you can actually use (or valuation allowance if you’re not profitable/maxing out the DTA)

US Buyer acquires a seller in a stock purchase for an equity purchase price of $1.5B. Seller has $400M of off-balance sheet NOLs expiring in 4 years, NOL portion of DTA is $100M. Adjusted rates for past 3 months is 3%, 4%, 5% and the buyer’s tax rate is 25%. What happens at close?

5% * 1500M = 75M (used each year). 4 years, so 300M. Since 400M, 100M remaining 100M is written down (at 25% tax rate, 25M is a DTA that is written down, adds to the total for “goodwill” in calculations)

Acquirer = equity value of $800M and EV of $1B. Acquires target with purchase equity value of $300M and EV of $400M. Before you know the mix, what can you say about the combined equity value & EV?

New Equity value = acquirer + shares issued - If all stock, then $1.1B - If not, then >= $800M, less than $1.1B So, it’s a range between $800M and $1.1B EV is just the combined EV, so $1.4B

A: NI = $200 Share Price = $6 Shares outstanding = 10 B: NI = $200 Share price = $5 Shares outstanding = 6 Company A buys B for all-stock at a 20% premium. What is the % change accretion/dilution?

Steps: 1) Purchase Price = $30 (at a 20% premium is 1.2*30= 36) 2) New net income (400) 3) New # of Shares (16+36/6= 22) 4) New EPS (400/22 -> $18.18) & Old EPS (200/6 -> $33.33) 5) % change vs old ((new/old-old) -> dilution of 45% (15/33)

Company A = $20/share, $100NI, 100 shares outstanding. Company B = $5/share, $50NI, 100 shares outstanding. A buys B with 60% stock, 40% cash. Assume 40% cash is funded by 10% pre-tax interest at a 20% tax rate (no synergies) What is the pro-forma ownership - is the deal accretive? By how much?

Pro-Forma Ownership: Company B purchase price = $500 (100 * $5). Stock portion = $300 (60% * $500), issuing 15 new shares ($300 / $20). Total shares = 115. A owns 86.9% (100 / 115) and B owns 13.1% (15 / 115). Cash portion = $200 (40% * $500). After-tax interest expense = $16 ($200 * 10% * (1 - 0.20)). EPS Impact: Standalone EPS = $1.00 ($100 / 100). Pro-Forma Net Income = $100 + $50 - $16 = $134. Pro-Forma EPS = $1.17 ($134 / 115). Accretive: Yes, accretive by $0.17 per share (+16.5%).

If buyer offers 30% premium with a 25x P/E and seller is a 20x P/E, is that accretive/dilutive for the buyer?

Dilutive (assuming an all-stock deal with zero synergies). At a 30% premium, the seller's effective acquisition P/E becomes 26x (20x * 1.30). Because the buyer's P/E (25x) is lower than the target's effective purchase P/E (26x), the transaction dilutes the buyer's EPS.

A company with a 10x P/E multiple buys a company with a 20x P/E multiple. What is the breakeven cost of debt that would cancel out the difference?

The target's yield is 1 / 20 = 5.0%. For a debt-financed acquisition to be EPS neutral (breakeven), the after-tax cost of debt must equal 5.0%. The pre-tax cost of debt is calculated as Target Earnings Yield / (1 - Tax Rate); assuming a 20% tax rate, the pre-tax breakeven cost of debt is 6.25% (5.0% / 0.80).

A buy B (market cap of $200) for 30% premium. Generates $15 in cost synergies. Company A trades at a 10x EV/EBITDa. Create or destroy value?

Premium = 200*30% = $60 $15 in cost synergies at 10x EV/EBITDA = $150 total value Net value creation (150-60), so it creates value. Note that this assume that synergies are permanent/long-lasting, not one-time or run-rate + doesn’t factor in the cost to actually realize these synergies

If you have WACC of 6%, acquirer’s WACC is 10% and a yield of 8%. Is it EPS accretive/dilutive (assuming you use the same capital structure blend as current company)? Does it create/destroy value?

Creates value (IRR > target’s WACC) but is EPS dilutive

What does equity value mean in terms of purchase price? If both Company A & B have the same equity value but company A has $200M in cash no debt but company B has $500M in debt no cash (same equity value), discounting synergies, which acquisition is more accretive?

Company A - both have the same equity value, but Company A is significantly cheaper to acquire thanks to its excess cash and low debt balance.

Company A is 2x the size of Company B and is planning on acquiring Company B. Company B has a 25x P/E multiple, while Company A has a 50x P/E multiple. Assuming an all-stock deal, what is the % accretion to EPS?

You can either assume multiples or use a formula (like the one listed below). x/1+x represents the impact of the new EPS by size (x is ratio of target/acquirer, it’s literally size of target/total size of combined company) In this case that means that it's 33.33% accretive (1/3 accretive) r-1 is the actual impact on net income (1 is the “expect” EPS, the EPS if it was the same as the acquirer. R is either greater/smaller and shows that impact).