Lecutre 3: The M&A Process And DCF

Question 1

What are the 10 phases of an acquisition?

Answer 1

1. Business plan
2. Acquisition plan
3. Search
4. Screen
5. First contact
6. Negotiations
7. Integration plan
8. Evaluation
9. Interesting
10. Captivating
    Busy Achieving Stirling Student Finds Numbers Incredibly Captivating, Interesting, Exciting

Question 2

What is included in a business plan?

Answer 2

1. porters 5 forces
2. SWOT
3. missions and visions
4. implementation strategy (go it alone, M&A, joint venture?)

Question 3

What is included in an acquisition plan?

Answer 3

1. Objectives
2. Timetable
3. Resource/capacity review (max size in terms of P/E, sales, cash flow)
4. Management preferences (stock purchase, cash only, competitions as targets)
5. Search plan (size, geography, max size)
6. Negotiation strategy (satisfy prices, employment contracts)
7. Determine initial offer price (minimum purchase price for standalone shares/liquidation value)
8. Financing plan (cash, stock, leverage?)
9. Integration plan (combine as rapidly as practical, retain key people, communication)

Question 4

What are brokers and finders?

Answer 4

They are confidential agents with fiduciary responsibility to either seller or buyer

Question 5

What criteria may be included in screening process?

Answer 5

• market segment
• product line
• profitability
• degree of leverage
• market share
• cultural compatibility

Question 6

What legal documents are included in the first contact stage?

Answer 6

• confidentiality agreements
• term sheets (price sheets, form of acquisition, extent of due diligence)
• letter of intent

Question 7

What are the objectives of due diligence?

Answer 7

• validate preliminary assumptions

- identify additional sources of/destroyers of value

Question 8

What are the activities in due diligence?

Answer 8

• detailed legal, financial, strategic & operating record reviews
• management interviews
• site visits
• customer and supplier interviews

Question 9

What is the formula for Total Consideration?

Answer 9

TC = Cash + PVstock + PVnet-debt

Composition of offer price

Question 10

What is the formula for Total Purchase Price?

Answer 10

TPP = PVtc + PVassumed-debt

Offer price plus assumed debt

Question 11

What is the formula for net purchase price?

Answer 11

NPP = PVtpp + PVother-assumed-liabilities - PVdiscretionary-assets

Question 12

What is the WACC formula?

Answer 12

WACC = Ke * E / (E+D+P) + i * (1-t) * D / (E+D+P) + Kp * P / (E+D+P)

Question 13

What is the formula for cost of equity?

Answer 13

Ke = Rf + B (Rm - Rf)

Question 14

What is the formula to lever a beta?

Answer 14

Bl = Bu * (1 + (D/E) * (1-t))

Question 15

What is the formula to unlever the beta?

Answer 15

Bu = Bl / (1 + (D/E) * (1-t))

Question 16

What is the formula for firm free cash flow?

Answer 16

EBIT * (1-t)
\+ dep
\+ amt
\+ prefered dividends
\+new debt issues
- change in net working capital
- gross capex
-principal payments

Question 17

What is the zero growth DCF formula?

Answer 17

FCFF / Ke

FCFF / WACC

Question 18

What is the constant growth DCF formula?

Answer 18

FCFF * (1+g) / (Ke - g)

Question 19

What is the variable growth DCF formula?

Answer 19

PV1-n = FCFF (1+g1)^n / (1+ke1)^n

PVn> = (FCFF (1+g1)^n (1+g2) / (Ke2-g2)) / (1+Ke1)^n

Question 20

How do you adjust the firm value?

Answer 20

PVffcf.adj = FCFF + PVd + PVnon-operating-assets - PVnon-operating-liabilities