M&A Deals and Merger Models Questions & Answers 100% Correct!!
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Module
M&A Deals and Merger Models
Institution
M&A Deals And Merger Models
Why would one company want to buy another company? - ANSWER IF IT BELIVES IT WILL BE BETTER OFF AFTER THE ACQUISITION TAKES PLACE:
- The seller's asking price is less than its implied value, i.e. the Present Value of its future cash flows.
- The buyer's expected IRR from the acquisition exceeds ...
M&A Deals and Merger Models
Questions & Answers 100% Correct!!
Why would one company want to buy another company? - ANSWER IF IT BELIVES IT WILL BE BETTER
OFF AFTER THE ACQUISITION TAKES PLACE:
- The seller's asking price is less than its implied value, i.e. the Present Value of its future cash flows.
- The buyer's expected IRR from the acquisition exceeds its WACC.
Buyers often acquire sellers to save money via consolidation and economies of scale to grow
geographically or gain market share, to acquire new customers or distribution changesl and to
expand their products. Deals are also motivated by competition, office politics and ego.
How can you analyze an M&A deal and determine whether or not it makes sense? - ANSWER The
qualitative analysis depends on the factors above: Could the deal help the company expand
geographies, products or customer bases, give it more intellectual property or improve its team?
The quantitative analysis might include a valuation of the seller to see if it is undervalued as well as a
comparison of the expected IRR to the Buyer's WACC.
EPS/Accretion-Dilution is every important in most deals because few buyers want to execute dilute
deals; investors focus on near term EPS, so dilute deals tend to make companies stock prices decline.
Walk me through a merger model (accretion/dilution). - ANSWER (the whole goal is to get the
combined EPS and subtract buyer's standalone EPS)
1. Project Financial statements of the buyer and seller.
2. Estimate the purchase price and the mix of Cash, Debt and Stock used to fund the deal.
3. Sources and uses table / Purchase price allocation schedule to estimate the true cost of acquisition
and its effects.
, 4. Combined Statements
- Balance sheets of the buyer and seller, reflecting cash, debt and stock used, new goodwill and write
ups.
- Income Statement - Reflecting foregone interest on cash, Interest on debt, synergies. If Debt or
cash changes over time your interest figures should also change.
5. The combined net income equals the Combined Pre-tax income *(1-buyer's tax rate), and to get
the combined EPS you divide that by the Buyer's Existing Share Count + New Shares Issued in the
Deal.
6. Calculate the Accretion/Dilution by taking the combined EPS, dividing it by the Buyer's standalone
EPS and subtracting 1.
Why might an M&A deal be accretive or dilutive? - ANSWER A deal is accretive if the extra Pre-tax
income from a seller exceeds the cost of acquisition in the form of Foregone Interest on Cash,
interest Paid on New Debt and New Shares Issued.
For example: If the seller contributes $100 in Pre-tax Income, but the deal costs the Buyer only $70 in
Interest expense and it doesn't issue any new shares, the deal will be accretive because the Buyer's
EPS will increase.
How can you tell whether an M&A deal will be accretive or dilutive? - ANSWER You compare the
Weighted Cost of Acquisition to the Seller's Yield at its purchase price.
Cost of cash = Foregone Interest Rate on Cash * (1-Buyer's Tax Rate)
Cost of Debt = Interest Rate on New Debt*(1-Buyer's Tax Rate)
Cost of Stock = Reciprocal of Buyer's PE multiple = NI/EqVal
Weighted Cost of Acquisition = (%Cash*Cost Cash)+(%Debt*Cost Debt)+(%Stock*Cost Stock)
Seller's Yield = Reciprocal of Seller's PE multiple, calculated using the purchase Equity Value
If the weighted cost of acquisition is < Seller's yield = Accretive
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