M&A Deals and Merger Models

Question 1

Why would someone want to purchase a company?

Answer 1

• Asking price is less than implied value
• IRR Exceed WACC
• If asking price is less than implied value than IRR will always exceed WACC.

Question 2

2 most important criteria in M&A deal

Answer 2

• Asking price lower than implied and the deal must have a decent chance of being neutral or accreditive to EPS.

Question 3

Financial Reasons for M&A

Answer 3

• Consolodation / Economies of scale
• Geographic expansion
• Gain market share
• Seller is undervalued
• Acquire customers or distribution channels
• Tax reduction (change headquarters to tax friendlier location.)
• Product expansion / diversification

Question 4

Fuzzy reasons for M&A

Answer 4

• Inellectual property / patent / key tech
• Defensive acquisition (them or us)
• Acqui-hire (Poaching employees)
• Intangibles (They’re cool and we’re not)
• Office politics, ego, and pride (This acquisition will help me become CEO and destroy my rivals.)

Question 5

Steps on a sell side M&A deal

Answer 5

Step 1: Plan the Process and Create the Marketing Materials.

Step 2: Contact the Initial Set of Buyers.

Step 3: Set Up Management Meetings and Presentations.

Step 4: Solicit Initial and Subsequent Bids from Buyers.

Step 5: Conduct Final Negotiations, Arrange Financing, and Close the Deal.

Question 6

Steps on buy side M&A deal

Answer 6

Step 1 is more about researching the market and finding the best acquisition targets.

In Step 2, you’ll contact this initial set of potential Sellers, gauge their interest in selling, and collect information from them.

Step 3: Set Up Management Meetings and Presentations.

Step 4: Solicit Initial and Subsequent Bids from Buyers.

Step 5: Conduct Final Negotiations, Arrange Financing, and Close the Deal.

Question 7

Advantages / Disadvantages to using cash in M&A deal

Answer 7

Advantages:

• Cheapest (low interest earned)
• Seller gets cold, hard cash immediately.
• No need for time consuming financing

Disadvantages

• Seller gets taxed immediately
• Seller can’t take advantage of upside in stock price

Question 8

Advantages / Disadvantages to using debt in M&A deal

Answer 8

Advantages:

• Cheaper than stock (Cost of debt vs. cost of equity)
• Seller gets cold, hard cash immediately.

Disadvantages

• Increase debt profile
• Financing expensive / time consuming
• Seller gets taxed immediatel
• Seller cant take advantage in stock price

Question 9

Advantages / Disadvantages to using Stock in M&A Deal

Answer 9

Advantages:

• Cheaper if buyer has a high stock price and p / e multiples.
• Faster than raising debt
• Seller can participate in upside of buyers stock
• Seller isn’t taxed until stock is sold

Disadvantages:

• More risk for seller since buyers share price could decrease following acquisition.
• May be lock up periods on the stock and seller cant sell for a certain amount of time.
• Fixed shares vs fixed value can deviate based on volatility.

Question 10

What is the key metric in M&A deals and why?

Answer 10

Only easy to calculate metric that captures the full impact of the deal.