Merger Model (M&A) Questions & Answers 100% Correct!!
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Merger Model
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Merger Model
What is an M&A model - ANSWER used to analyze the financial profiles of 2 companies, the purchase price, and how the purchase is made, and determines whether the buyer's EPS increases or decreases.
Walk me through a basic merger model - ANSWER Step 1: Making assumptions about the acquisition -...
Merger Model (M&A) Questions &
Answers 100% Correct!!
What is an M&A model - ANSWER used to analyze the financial profiles of 2 companies, the
purchase price, and how the purchase is made, and determines whether the buyer's EPS increases or
decreases.
Walk me through a basic merger model - ANSWER Step 1: Making assumptions about the acquisition
- the price and whether it was cash, stock or debt, or some combination of those.
Step 2: You determine the valuations and shares outstanding of the buyer and seller and project out
an income statement for each one
Step 3: you combine the income statements, adding up line items such as revenue and operating
expenses, and adjusting for foregone interest on cash and interest paid on debt in the combined pre-
tax income line; you apply the buyer's tax rate to get the combined net income, and then divided by
the new share count to determine the combined EPS/
What is the difference between a merger and an acquisition? - ANSWER There are always a buyer
and seller in any M&A deal - the difference is that in a merger the companies are close to the same
size, whereas in an acquisition the buyer is significantly larger
Why would a company want to acquire another company? - ANSWER *The buyer wants to gain
market share by buying a competitor
*The buyer needs to grow more quickly and sees an acquisition as a way to do that
*The buyer believes the seller is undervalued
*The buyer wants to acquire the seller's customers so it can up-sell and cross-sell to them
*The buyer thinks the seller has a critical technology, intellectual property or some other "secret
sauce" it can use to significantly enhance its business
*The buyer believes it can achieve significant synergies and therefore make the deal accretive for its
shareholders
, Why would an acquisition be dilutive? - ANSWER An acquisition is dilutive if the additional amount
of net income the seller contributes is not enough to offset the buyer's foregone interest on cash,
additional interest paid on debt, and the effects of issuing additional shares.
Acquisition effects - such as amortization of intangibles - can also make an acquisition dilutive.
Is there a rule of thumb for calculating whether an M&A deal will be accretive or dilutive? - ANSWER
In an all-stock deal, if the buyer has a higher P/E than the seller, it will be accretive; if the buyer has a
lower P/E, it will be dilutive.
If the deal involves just cash and debt, you can sum the interest expense for debt and the foregone
interest on cash, then compare it against the seller's pre-tax income.
If the deal involves cash, stock, and debt, there's no quick rule-of-thumb you can use.
What are the complete effects of an aquisition? - ANSWER *Foregone interest on cash (the buyer
loses the interest it would have otherwise earned if it uses cash for the acquisition)
*Additional interest on debt (the buyer pays additional interest expense if it uses debt)
*Additional shares outstanding (if the buyer pays with stock it must issue additional shares)
*Combined financial statements (after the acquisition, the seller's financials are added to the
buyer's)
*Creation of goodwill & other intangibles (these balance sheet items that represent a "premium"
paid to a company's "fair value" also get created)
If a company were capable of paying 100% in cash for another company, why would it choose NOT to
do so? - ANSWER To save its cash for something else or it could be concerned about running low if
the business takes a turn for the worst
Its stock may also be trading at an all-time high and it might be eager to use that instead (this would
be more expensive but is attractive to executives because of the large safety cushion of the cash
balanace)
Why would a strategic acquirer typically be willing to pay more for a company than a private equity
firm would? - ANSWER Because the strategic acquirer can realize revenue and cost synergies that
the private equity firm cannot unless it combines the company with a complementary portfolio
company.
Those synergies boost the effective valuation for the target company.
Why do Goodwill & Other Intangibles get created in an acquisiton? - ANSWER These represent the
value over the fair market value of the seller that the buyer has paid. You calculate the number by
subtracting the book value of a company from its equity purchase price.
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