Merges and Accquisitions Flashcards
(19 cards)
Why may one company want to acquire another company?
There are stated and unstated reasons. The stated ones include growth, the by
buyer´s organic growth has slowed and they need to grow in other ways to satisfy growth expectations of WallST. Another reason is that the deal is expected to create significant synergies, revenue or cost synergies. Another reason is that if the buyer thinks the target is undervalued or its own stock is overvalued it can use its stock as cheap money. Unstated reasons can include the CEO wanting a larger company for compensation or ego, also to diversify and reduce risk or prevent a competitor from making an acquisition that can give them a competitive edge.
Explain synergies and give examples
Synergies occur when the sum of the value of the buyer and target combined is larger than their values separated. Most mergers and large acquisitions are justified due to synergies. We have cost and revenue synergies. Cost synergies refer to the ability to cus costs of the combine company due to consolidation of operations (laying off one set of managers). Revenue synergies refers to the ability to sell more products or raise prices due to merger (increasing sales thanks to co-branding) and economies of scale apply to both.
Explain mergers and tender offers and their differencess
Mergers are used in friendly deals and a company will buy stock from the target´s shareholders, usually the terms are negociated and then the board of the target has to approve it and so do the shareholders vote. A tender offer can be used in hostile or unsolicited deals, here, the acquirer makes an offer directly to the shareholders and the price usually has a premium and then the board makes a recommendation to the shareholders. A successful merger usually results in 100% of the shares being acquired while a tender offer typically not. In a tender offer the buyer will usually have to make a second transaction to acquire 100% of shares. Tender offers are quicker if the purchase consideration is in cash while mergers are more likely if the consideration is stock or if there are regulatory issues.
Pros and cons of asset vs stock purchase.
Stock purchases can generally be excecuted faster than an asset purchase and is generally used for acquisitions or public companies. Stock purchases also mean the seller is not double taxed and sometimes can even put off all taxes. Disadvantages of stock transaction is the buyer does not get a step up tax basis and cannot pick and choose assets to acquire so they also get the liabilities.
Asset purchases means the buyer can choose the assets they want and leave behind liabilities they do not want and buyers get a step up in tax basis because they can write up the value of acquired assets which allows them to offset taxes due to an increase in depreciation and amortization. A disadvantage is that there is double layer of taxes to the seller, first the company pays taxes on capital gains from sold assets and then the shareholders of the sellers pay taxes (dividend) on the cash distributed from the sales. Another disadvantage is that the transaction takes longer as each asset needs to be valued and transferred.
Do buyers prefer stock or asset deals?
Buyers prefer deals structured as asset purchases even though they are longer because of the step up of tax basis and the ability to pick and choose assets and leave liabilities behind.
Do sellers prefer stock or asset deals?
Sellers prefer stock deals because of the single layer of taxation and no bad assets or liabilities that remain.
Walk me through the M&A sell side process!!!
The typical sell-side M&A deal transaction is known as a two stage auction process. The IB representing the seller first sends out a teaser to prospective buyers along with a confidentially agreement. The IB then sends out a Confidential Information Memorandum (CIM) to parties interested and that have signed the confidentially agreement. The CIM is a lengthy document similar to a 10K. Buyers then are expected to submit a first round of non binding bids. The bank and client will then select buyers which get invited into the second round of bidding, these buyers are invited to management presentations and given the opportunity to do due diligence using the data room, which is an electronic database that contains a lot of information on the target so buyers can make their final bid. Binding final round bids are then submitted and the sell side IB and its client will decide who wins the auction. Following any further negotiations and due diligence contracts are signed and after regulatory and other approval processes the deal will close.
Tell me the types of buyers and auctions.
There are two main types of buyers, financial and strategic. Financial are when PE firms want to purchase a company and strategic are usually firms in the same industry. When there is a small amount of prospective buyers we call this a targeted auction and a large number of buyers is a broad auction.
Would an IB prefer to be on the sell side of buy side of an M&A deal?
IBs prefer the sell side of a deal since the sell-side adviser is much more likely to receive a success fee/transaction fee for the deal being complete. This is because there are multiple buyers but only one seller.
What are some marketing documents that banks create when working on a sell-side M&A transaction?
Some of the marketing documents are the teaser, confidential information memorandum and management presentation.
What analysis is performed by bankers on an M&A assignment?
Valuation of the target with detailed modelling of the target. In addition often other analysis such as accretion/dilution analysis, full blown merger, contribution analysis and analysis at various prices (AVP).
Walk me through an accretion/dilution analysis
An accretion/dilution analysis is done to project the impact of an acquisition to the acquirer´s earnings per share (EPS) and compare how the new EPS (known as the proforma EPS) compares with what the EPS would have been if the transaction was not excecuted.
In order to do this analysis we project the combined company´s net income (pro forma net income) and the combined new share count. The pro forma net income will be adjusted to be post tax and include synergies and increased interest expense (if debt is used to finance the purchase) or increase interest income (if cash is used) and new intangible asset amortization. The pro forma share count reflects the acquirer´s share count plus the number of shares to be created and used to finance the purchase (in a stock deal). Dividing pro forma net income by pro forma shares gives us pro forma EPS which we compare to the acquirer´s original EPS to see if the transaction results in an increase in EPS (accretion) or decrease (dilution). Usually we perform this analysis using one and two year projected net income and sometime LTM pro forma net income.
Formula for calculating pro forma net income
Pro Forma Net Income = Target + Acquirer´s Net Income - After tax interest expense - after tax forgone interest income - after tax amortization - after tax depreciation + after tax synergies
remember good will does not get amortization
How do we calculate pro forma shares
In a cash transaction there is no change in shares so just use fully diluted shares of acquirer. In a stock transaction we have to do an exchange ratio
Exchange Ratio = Purchase Price per Share * % Stock consideration/ Acquirer share price
New shares created = exchange ratio * target´s fully diluted shares
then add them to acquirer´s fully diluted shares
What factors can lead to the dilution of EPS in an acquisition?
One is that the target has negative net income (lowers numerator of EPS). Another is that the target´s P/E ratio is greater than the acquirer´s and the third is that the transaction creates a significant amount of intangible assets that need to be amortized. Another is the increase in interest expense due to new debt another the decreased net income due to less cash and finally low or negative synergies. So just the formula
If the buyer has a low P/E and the target has a high P/E in an all stock deal will this be accretive or dilutive?
Other things being equal the deal will be dilutive to the acquirer´s EPS. This is because the acquirer pays more for each dollar of earnings than the market values its own earnings. Hence the acquirer has to issue proportionally more shares in the transaction so pro forma income will increase less than pro forma share count so EPS declines.
What is analysis at various prices?
Shows the implied acquisition premium and various multiples at range of different purchase prices
What is a contribution analysis?
Is an analysis that shows in graphical form the % of contribution of various metrics from both the acquirer and the target that make up the combined company. Financial metrics include revenue, EBITDA, non financial metrics include employees, stores etc.
What is a full blown merger model
A full blown merger model is
an integrated cash flow model of the combined companies. With this model bankers can run accretion/dilution analysis and others.
