Risks in M&A

Question 1

Operational risks

Answer 1

Higher fixed operational costs

Higher volatility of performance

Question 2

Financial risks

Answer 2

Higher leverage
Higher burden of interest
Higher costs and risks.

Question 3

What to do if high Operational risk?

Answer 3

buyer should reduce leverage

Question 4

Operational (Low)- Financial (Low)

Answer 4

acquisitions, rationalization, company restructuring

Question 5

Operational (High)- Financial (Low)

Answer 5

operating profits, recapitalization

Question 6

Operational (Low)- Financial (High)

Answer 6

asset restructuring, financial restructuring

Question 7

Operational (High)- Financial (High)

Answer 7

turnaround, financial restructuring

Question 8

FORMULA: EPS

Answer 8

EPS=(Net Income – Pref divid )/End of period common shares

Question 9

When EPS are diluted?

Answer 9

if post deal EPS > Acquiror initial EPS (not mean value destruction)

Question 10

Earnings dilution

Answer 10

Target P/EPS > buyer’s P/EPS (buyer experience it)