Key Rules #4 and #5

Question 1

What is the equation of the purchase price of a public co?

Answer 1

What you really pay
Target Purchase EqV + Transaction fees - target’s excess cash

Question 2

How does target public co debt get treated?

Answer 2

• buyer assumes debt w no change, no repayment no replacement
• buyer replaces target’s existing debt w some amt of new debt
• buyer repays target debt w buyer’s cash

Question 3

How likely is it that buyer will assume target debt w no change?

Answer 3

unlikely b/c against terms of debt issuance

Question 4

buyer assume target debt w no change- effects?

Answer 4

• doesn’t icrease amount acquirer really pays for target
• target’s interest expense stays the same

Question 5

Buyer replaces target’s existing debt w some amt of new debt- what are the effects?

Answer 5

• doesnt increase what buyer actually pays
• may increase target’s interest expense b/c higher leverage, more credit risk

Question 6

Buyer repay’s target debt w buyer’s cash- how likely?

Answer 6

Unlikely

Question 7

Buyer repay’s targets debt w buyer’s cash- what are the effects?

Answer 7

• increase purchase price
• increase inteerst expense of target
• buyer interest income change

Question 8

Target’s excess cash- what about it?

Answer 8

doesn’t exactly decrease- Purchase EqV includes it but acquirer didn’t pay for it so gotta minus off

Question 9

What is the max amt of cash in order to fund deal before fees?

Answer 9

combined cash - acquirer min cash - target min cash

Question 10

Purchase TEV formula?

Answer 10

Purchase EqV + Target Debt - Target Cash

Question 11

How are most acquisitions of private companies structured?

Answer 11

cash free debt free

Question 12

What are acqs of private cos based on?

Answer 12

TEV and TEV mults

Question 13

What is the actual purchase price of a private co?

Answer 13

Purchase TEV + transaction fees + target min cash

Question 14

What do shareholders in a cash free debt free private co deal?

Answer 14

Purchase EqV
(Purchase TeV + cash - debt)

Question 15

In a private co target, how do debt and cash get treated if debt > cash?

Answer 15

• target uses entire cash balance to repay as much debt as it can
• remaining debt subtracted from purchase price -> shareholder proceeds are lower

Question 16

In a private co target, how do debt and cash get treated if cash > debt?

Answer 16

• target repays entire debt w cash
• remaining cash distributed to shareholders

Question 17

What is combined EqV’s formula

Answer 17

• acquirer EqV + market value of stock issued in deal

Question 18

What happens to seller’s value?

Answer 18

doesn’t disappear, gets trasnferred to cash stock debt buyer uses to acquire it

Question 19

What is combined TEV formula?

Answer 19

acquirer current TEV + target purchase TEV

Question 20

How does combined TEV and its mults change if financing method changes or if shares issued changes?

Answer 20

no change

Question 21

Why doesnt combined TEV and mults change if financing mtd change?

Answer 21

NOA of acquirer and target stay same, just financing data
TEV EBIT EBITDA Rev don’t change are not per share metrics

Question 22

What are the combined TEV mults, roughly?

Answer 22

In between acq trading mults and target purchase mults

Question 23

Why does combined P/E change?

Answer 23

Combined NI changes b/c based on cash debt used and interest rates

Question 24

But how could combined TEV mults change still?

Answer 24

• to assume it won’t change is too simple
• revenue synergies and expense synergies can change it
• if market doesn’t like deal

Question 25

How could market not liking deal decrease Combined TEV?

Answer 25

- market doesnt like deal -> acquirer stock price fall -> purchase EqV and TEV same -> combined EqV, combined TEV lower b/c acquirer stock price lower -> buyer uses more shares to do deal -> deal less accretive

Question 26

Combined PE mult- what can it look like?

Answer 26

in between mults of the cos closer to co with larger PE mult

Question 27

You can use the combined EBITDA of the combined company to see the Debt/Ebitda ratio to see if the acquirer can issue debt.

Answer 27

B/c they're gonna be combined anyway so might as well.