M&A Flashcards
1
Q
Reasons for M&A?
A
- Diversification
- Horizontal Expansion (related businesses)
- Vertical Expansion (along value chain)
- Synergies
- Economies of Scale
- Acquisition of new technologies
- LBO
- Target undervalued
- Irrational reasons (Imperialism,…)
2
Q
What drives M&A activity?
A
- Synergies
- Need to acquire new tech
- Grow share in market/remove competitor
- Buying supplier or distributor to increase pricing power
- Improve financial metrics
3
Q
Sort valuations from highest to lowest valuation:
A
- Precedent transactions (company pays control premium)
- DCF (frequently optimistic; sensitive terminal value)
- Market Comps
- Market Valuation (just equity, no premiums)
4
Q
Ways to value a company:
A
- Comparables/Multiples
- Market Valuation/Capitalization
- DCF
5
Q
Why would company issue equity rather than debt?
A
- If share price is inflated, they can raise more money
- If CF from coming investments to immediately produce profit, they can finance themselves longer term
- Adjust cap structure or pay down debt
- If owners want to sell portion
6
Q
Reasons for sale of company?
A
- Not core business anymore
- Restructuring after over indebtedness
- Elimination of negative synergies
- Sale of family run business without offspring
- Split of conglomerates
- End of an LBO
- Antitrust forces split of company
7
Q
What are EOS?
A
With larger size, fixed costs get distributed across more “individual parts” of business. Transform business better through larger size.
8
Q
More horizontal or vertical mergers?
A
Horizontal a lot more; trend in business to focus on what you can do best; stick to own qualities
9
Q
3 opportunities to sell company
A
- Trade Sale (sell to strategic investor)
- IPO
- Spin-Off
10
Q
Which types of processes are there in M&A?
A
- Friendly takeover
- Hostile takeover
- Merger of equals
11
Q
What’s a Pitch Book?
A
PowerPoint presentation designed to win new business. The pitch is typically an explanation of why the bank in question is best suited to lead the transaction and why they should be engaged by the client.
12
Q
What is included in a Pitch Book?
A
- Title page: Logos, date, title
- Table of Contents
- Executive Summary: Reason for pitch and call to action
- Team & Bank Intro: introduce people at meeting
- Market Overview: Charts and graphs
- Marketing Strategy
- Equity Story
- Valuation: Comps/Prec. Transaction/DCF on Football Field
- Transaction Strategy: IPO/acquisition/sale; primary/secondary
- Structure of Banking Syndicate: Global Coordinator(s), Joint Bookrunner, Co-Leads
- Timeline
- Summary: Why relevant; how market environment suitable; why valuation is achievable
- Appendix: Mostly backup information on potential questions
13
Q
Main points of Sell-Side process
A
- Identify universe of potential buyers
- Valuation of company
- Preparation of auction process or direct bilateral discussion with buyer, if high potential of actual transaction
- Advisory of seller about potential alternatives (IPO, Spin-Off,…)
- Preparation of Marketing Materials (Equity Story, Teaser, Info Memo, Management Presentation)
- Help on preparation of Vendor Due Diligence
- Discussion of final due diligence with remaining potential buyers
- Signing of Sales & Purchase Agreements
14
Q
Main points of Buy-Side process
A
- Search for potential acquisition target
- Help on strategic review
- First communications with targets and preparation of LOI (letter of intent)
- Valuation of company
- Due diligence on basis of Vendor Due Diligence
- Risk analysis on potential other bidders
- Preparation of submission of first bid
- If successful and still intent to buy: Preparation of detailed due diligence
- Working out financing
- Discussion and signing of Sales & Purchasing Agreement with final bid
15
Q
What is a Vendor Due Diligence?
A
Less detailed due diligence from target for all potential buyers to start from when working on their own (much more detailed) due diligence. Risks of a VDD are bias, conflicts of interest, etc.
16
Q
Important documents of M&A process?
A
- NDA: to receive more detailed information upon assurance of no further distribution
- Teaser: short information overview to attract attention from potential buyer
- Information Memorandum: detailed company info (50-100 pages)
- Management Presentation: ~100 slides about management
- Process Letter: Sent from sell-side IB to all potential buyers to explain process structure and timeline
- Letter of Intent (LOI): document signed by both parties; not legally binding; about agreements on M&A deal to efficiently continue discussion
- Term Sheet: Another name for LOI
- Sales & Purch. Agreement (SPA): final agreement on basis of LOI; legally binding
17
Q
How do you evaluate if M&A deal makes sense or not?
A
Very complex and encompasses a lot of factors but the three most important considerations are:
- Strategy: Long-term benefits? EOS? New Technologies?
- Shareholder Value: Is Shareholder Value optimized? I.e. NPV>0
- Finances: Capital structure; EPS; Risks
18
Q
What are the main chapters in an SPA?
A
- Preamble: Short Overview of included parties
- (Definition of Terms): Explaining words etc.
- Target: What is bought? Share Deal or Asset Deal?
- Closing Conditions: What are the prerequisites for successful transaction
- Covenants: Which duties does the seller take on between Signing and Closing?
- Transaction price: EV
- Transaction price adjustments: Via EV-Equity Bridge adjusting for some metrics
- Representations & Warranties of Seller: Assuring correctness of info like VDD
- Representations & Warranties of Buyer: Assuring correctness of buyer’s materials
- Indemnification: Assurance of seller being responsible for damage happening after transaction
19
Q
What are examples of revenue and cost synergies?
A
Revenue:
- Higher prices as a result of better bargaining power
- Cross-Selling of products
- Easier expansion into newer markets
Cost:
- Usage of fewer plants (only one headquarter, etc.)
- EOS in acquisition of new inventory
- Consolidation of employees
20
Q
Does a consolidation or diversification have more EOS?
A
Consolidation, as it is more similar by definition and therefore more opportunity to use same resources.
21
Q
Are Cost- or Revenue-Synergies more important?
A
Cost, as they are much more quantifiable and plannable
22
Q
How do you determine if a transaction is an asset or share deal?
A
A share deal is when a company’s stock is bought. An asset deal is when all assets are bought and integrated in buyer company. Which one makes more sense is depending on situation. Things to consider:
Share Deal:
- After takeover, entire ownership is automatically transferred
- Therefore, object of transaction is easily identified
- If real estate is included in the juristic shell, no RETT (RE transfer tax) has to be paid
- Detailed DD necessary because not only all assets but also all liabilities are bought
- No changes for employees
- Extensive regulatory approvals necessary (Management, Shareholders, Board etc.)
Asset Deal:
- Process more complex as every single asset is acquired and not company as a whole
- Buyer can choose assets that he wants and leave others out
- Real estate is taxed as assets change owner
- Certain liabilities are not necessarily transferred (but rather rare in practice as buyer can’t just leave liabilities back)
- Employees also make transition. It is not possible to leave them back in old company
- Generally, less approvals necessary as “only” plants and equipment are sold instead of company itself
23
Q
Are there more asset or share deals?
A
Share Deals by a lot. Asset Deals are mostly happening in distressed and insolvency situations. Share Deal is simpler as a clearly defined object is sold.
24
Q
When will a company prefer to pay in cash (Cash Deal) and when in stock (Share Deal)?
A
- Cash Deal requires enough cash on BS or possibility to acquire
- Valuation of target and own company. If own company is overvalued, it might be worth doing a Share Deal. If target is undervalued, it is worth doing a Cash Deal as you could realize all gains from difference to FMV which you otherwise would have to share with shareholders.
25
What are pros and cons of Share- and Cash-based Deals?
- Share deals are much more complex than just paying cash
- Share deals very influential on whether deal is accretive or dilutive
- Share deal good if own stock is overvalued (more money) but these profits also have to be shared with shareholders
26
FMV of a company is at €2.3b. Buyer decides to buy €2.4m. What could be reasons for this?
FMV not objectively measurable. Buyer could have a lot of synergy possibilities with target
27
What’s the difference between signing and closing in an M&A process?
Signing is when SPA is signed. Transaction is thereby approved by both parties and legally binding. M&A process however isn’t finished yet and company only goes from seller to buyer after closing. Closing happens after all “Conditions Precedent” are fulfilled. CPs are the things that both parties still have to do (payment of acq. price; cartel things etc.)
28
Which risks occur for a buyer of a company between signing and closing and how can they be mitigated?
After signing, deal is legally binding and acquisition price is set. Seller however retains company until closing and could put the company at risk during this time. Usually, seller is obligated to only do “usual business” between signing and closing.
29
Should dilutive deals never be done?
No. The decision is much more complex than that considering strategic value and future accretion.
30
What is a big weakness of EPS in evaluating an M&A deal?
EPS is a highly condensed number, depending on many factors. Earnings Growth is important. Dilutive deal can become Accretive if Earnings Growth is strong enough. Furthermore, EPS is driven by accounting standards which are manipulable.
31
Company A is valued at P/E of 10x and buys Company B in an all-Stock Deal. B is valued at 15x P/E. Is the deal accretive or dilutive?
Because it’s an all-share deal, it is dilutive. Company A pays more per unit of earnings than it is worth and therefore dilutes existing shareholders.
32
Company A buys Company B and pays in Cash. Both companies are of the same size and value. A is valued at 15x P/E and B is valued at 17x P/E. Is this deal dilutive?
Not necessarily. In an all-share deal it would be dilutive. Since it’s a cash deal, we have to find out where cash is coming from and what interest we potentially have to pay for it. In all-cash deal, the number of stocks stays the same, however, Earnings change drastically (increase because of new company; decrease because of potential interest payments).
33
Company A has 10m stocks @€10 and wants to buy Company B that has 20m stocks @€3. A has earnings of €12m, while B has earnings of €1.2m. A can buy B with 50% stock and 50% cash from new debt @4%. Taxes are 30%. How are EPS before and after the deal?
Before: €1.2 (€12/10)
After: Use Formula: EPS= (Earnings_B + Earnings_T - New Interest*(1-Tax)) / (#Shares_B + Share Price_T/SharePrice_B * #Shares_T * % of share deal)
In this case: EPS = (12 + 1.2 – 30 * 4% * (1 – 30%)) / (10 + 3/10 * 20 * 50%) = 12.36/13 = €0.95
The deal is dilutive.
34
How do you get a Break-Even Price for an All-Share Deal, which assures EPS that remain at pre-transaction value?
EPS_BE = #Shares_B * Eearnings_T * Shareprice_B / (#Shares_T * Earnings_B)
35
A company announces a very accretive deal. The next day the market opens and the share price plummets. Why?
Usually if majority of market participants don’t see that much value in transaction. Destruction of Shareholder value and EPS accretion are not a contradiction. EPS is just a snapshot, while share price is effect of a longer-term development. Reasons:
- Deal is now accretive but dilutive in future
- Strategic thoughts behind acquisition are not reasonable
- Acquisition leads to more damage than good in long-term competition in market
- Management has paid too much for today’s EPS accretion and thereby reduced shareholder value
36
How would you find out how much debt a company can take on to buy another company?
No right answer but usually look at Leverage (Net Debt/EBITDA). Below 2.5x it is solidly financed. Between 2.5x and 3.5x it is still investment grade. Above 3.5x and 4.0x it gets riskier very quickly (PE LBOs etc.). IB analyzes according to peer group about how much leverage it can still take on and how much cash-flow it has to pay interest. Thereby it can analyze how much debt the company can still take on (“Firepower Analysis”).
37
What is a Firepower Analysis?
To find out how much more debt a company can take on (usually regarding a transaction). Note that the newly acquired investment increases EBITDA and therefore again reduces leverage (ND/EBITDA), which allows even more debt (calculate using Goal-Seek in Excel).
38
Is it better to be bought from a strategist or PE from a Management perspective?
No right answer but some considerations:
- After acquisition by strategist, previous management either transitions to mother company or gets laid off
- PE investor sometimes lays off part of management
- Management is usually incentivized by performance bonuses in LBO
39
What is a Fairness Opinion?
Objective opinion by third-party investment bank; often consulted by board of target company.
40
In a fairness opinion would you put in the price that is reasonable from the perspective of the target to approve that the bidder’s price is fair?
No, never. Fairness opinion is there to evaluate fairness of a certain bid but not a target price. Offering a target price would lead to potentially lower offers if this threshold is publicized.
41
Who pays more for a company, a strategist or PE?
Usually a strategist, as it can realize synergies and use new technologies as well as expand into new markets. PE LBO only cares about performance and usually doesn’t use any synergies etc. since the company stays the same.
42
Which possibilities does a company have to avoid takeover?
- Poison Pill: generally everything that stops buyer; e.g. special subscription rights for existing investors that dilute ownership of buyer after transaction; transferring subsidiaries into foundation so that it can’t be sold off easily anymore
- Greenmail Payments: If investor has significant shares in company, management can offer to buy back shares (at premium) to stop takeover; potentially only short-term
- Golden Parachute: Management usually has multi-year contracts and they receive payments for contracts that are stopped earlier (“Severance Payments”). In a Golden Parachute, these payments are so high that the buyer doesn’t want to take over company anymore
- White Knight: Instead of being taken over by attacker, look for “white knight” that does friendly takeover or buys blocking minority
- Dual-Class Shares: one class of shares with lots of voting rights and other with few or none. These “less powerful” shares are open to public investors while “Golden Stock” is retained by Management etc.
- Staggered Boards: Board can’t be exchanged immediately but only a few people can switch positions every year
- Super-Majority Provisions: raises necessary approval for transaction from 50% or 2/3 to e.g. 80% which makes takeover much harder as more voting rights are needed
- Pacman-Defense: Initiate takeover of buyer by seller
- Media Campaigns
43
What’s the difference between Goodwill and Other Intangibles?
Mainly that Other Intangibles are amortized over a set period of time and Goodwill is only amortized in case of an impairment.
44
What are the three types of mergers?
- Horizontal (with competitor)
- Vertical (supplier or distributor)
- Conglomerate (completely unrelated)
45
Walk me through the impact of an asset write-down on the financial statements
The write down is regarded as a loss so goes through IS and reduces taxable income and may create a DTA (DTA = write-down * tax rate). On the CFS the write-down is added back. On BS you have the asset written down, the new DTA and the change in cash that you have. Everything should balance with RE on the liabilities side.
