Mergers Flashcards
(24 cards)
When is a deal accretive/dilutive (broadly)
An accretive deal is when the purchase increases the EPS and a dilutive deal is when it decreases the EPS
How to calculate EPS?
Net Income / Outstanding Shares
How do you combine income statements?
You add together everything on the income statement down to pre-tax income
Multiple the combined pre-tax income by the buyers tax rate
Add new shares issued (not sellers shares outstanding) to shares outstanding and then divide net income by the new share count
How to calculate goodwill?
It should be difference between combined assets (minus however much buyer paid in cash) and combined liabilities (add any new shares/debt from deal)
*can also be called other outstanding assets (but you need to amortize other intangible assets)
What happens to goodwill on the sellers balance sheet?
You write it down to zero
What are key items to be adjusted on the income statement?
1) Synergies
2) Depreciation & Amortization
3) Foregone interest on cash (cash used * interest rate)
4) Interest paid on new debt
5) Shares outstanding
When is a deal dilutive (generally)
When the amount of Pre-Tax Income the seller contributes is less than the foregone interest on cash, the cash paid on debt, and the new shares issued
General rules of thumb for accretion / dilution
1) Buyers almost always prefer to use 100% cash because it is cheaper than debt
2) In 100% stock deal, if the buyer has a higher P / E than the seller, the deal will be accretive. You can flip the P / E to find the % value for each share
3) You can calculate the weighted average cost of each form that you bought it from and if it is greater than the Yield of Seller then it is dilutive
How to calculate P / E?
Equity Value / Net Income
How to calculate cost of cash?
Foregone Interest Rate on Cash * (1-Buyer Tax Rate)
How to calculate cost of debt?
Interest Rate on Debt * (1-Buyer Tax Rate)
How to calculate cost of stock?
Reciprocal of the Buyer’s P / E (Net Income / Equity Value)
How to calculate yield of seller?
Reciprocal of Seller’s P / E (Net Income / Equity Value)
Some problems with calculating weighted average cost?
1) Doesn’t account for synergies
2) Doesn’t account for new D&A
3) Doesn’t account for the premium paid for the seller (you can fix this by Net Income / Price Paid for Company)
What is foregone interest on cash?
This is what the buyer loses by paying cash (e.g., the money they could have collected from the interest on the cash they used to buy the company)
What is additional interest on debt?
The additional interest expense the buyer pays for debt
What is additional shares outstanding?
If the buyer pays with stock, it will reduce its EPS because there are more shares
What happens to PP&E in a merger?
You can sometimes write up the values of assets in an acquisition if you think the market values exceed the book values
How to combine deferred tax liabilities?
You write off the seller’s existing DTL and then create a new one based on the buyers tax rate
What do you do with legal and advisory fees in a deal?
You expense these fees and deduct them from cash and retained earnings at the time of the transaction
What do you do with financing fees?
You capitalize financing fees and then amortize them
How do you model revenue synergies?
Assuming a price increase on units sold or assume additional volume sold
How do you model expense synergies?
1) If you’re firing people, you can multiple the cost of each employee by how many you can let go
2) If you’re consolidating buildings you can just write off the expense of the building
