Key Rule #1 & #2 Flashcards
(48 cards)
Why do M&A? (Macro reason)
acquirer will benefit from increased cash flow and profits
What does the discount rate mean to the acquirer?
the DR acquirer picks for the valuation of the deal is the minimum intended return of the deal
What is the IRR and DR if the target is undervalued?
IRR > DR
When is an acquisition made?
asking price < implied value (PV of future cash flows)
What are the 2 categories of M&A reasons?
financial and fuzzy
How do you tell if a target is undervalued?
selling price < implied price
IRR > DR
What should a deal do to the EPS?
neutral/ accretive
What is the definition of EPS?
Net Profit / common shares outsanding
What does EPS indicate?
profitability
An increase in EPS means what?
increase in profitability
Why do we care about EPS in M&A?
EPS reflects all effects of Acq
What is the difference between a merger and an acquisition?
- M: closer in size, ownership split more impt
- A: buyer much bigger
List the m&a funding sources from cheap to expensive
cash, debt, equity
What is the buyer’s first choice of funding?
excess cash
What are the 2 methods of using equity to fund m&a?
- issue shares to others for $ then pay
- issue shares to seller in exchange for their shares
What is the downside of using equity to fund your m&a?
dilute existing equity investors
What are synergies?
- 2 cos tgt produce a result not independently obtainable (greater than a + b)
Why do synergies make firms want to m&a?
- higher revenue
- lower expenses by combining, elimiate redundant services
- lower overall cost of capital
What are strategic reasons for M&A?
- fill in strategic gaps
- get access to certain channels
- broader market access
What are biz reasons for m&a?
- bargain purchase- cheaper to buy than to invest internally
- diversification- achieve more long term growth and profitability in a mature industry
- short-term growth- boost poor performance
- undervalued target- target is a good investment eg. sponsor acquiring poorly performing cos
How can you tell if an M&A deal makes sense?
- is it undervalued? (IRR vs DR, target price vs implied value)
- qualitative analysis- does it really achieve the biz aims
- is it accretive? increase EPS?
What is a merger model?
it measures estimated accretion/ dilution to an acquirer’s EPS from the impact of an M&A transaction
Why do we use EPS when evaluating a merger?
only easy to calculate metric that capture’s deal’s full impact
What aer the steps in a merger model?
- get financial stats for buyer and seller
- calculate purchase price
- estimate cash debt stock percentage to fund deal
- estimate weighted cost of acquisition
- Is the deal accretive or dilutive?
- combine both cos pre-tax incomes and adjust for acquisition effects
- calculate combined NI and EPS
- calculate EPS accretion/ dilution
