M&A Deals and Merger Models Questions & Answers 100% Correct!!
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Course
M&A Deals and Merger Models
Institution
M&A Deals And Merger Models
Financial reasons one company might acquire another? - ANSWER Economies of scale
Geographic expansion
Gain Market Share
Seller is Undervalued
Acquire Customers or Distribution Channels
Tax Reductions
Product Expension/Diversification
"Fuzzy" reasons for M&A? - ANSWER IP/Patent/Key Tech
...
M&A Deals and Merger Models
Questions & Answers 100% Correct!!
Financial reasons one company might acquire another? - ANSWER Economies of scale
Geographic expansion
Gain Market Share
Seller is Undervalued
Acquire Customers or Distribution Channels
Tax Reductions
Product Expension/Diversification
"Fuzzy" reasons for M&A? - ANSWER IP/Patent/Key Tech
Defensive Acquisition
Acqui-Hire (hiring good teams)
Intangibles
Office politicis, ego, pride
Advantages/Disadvantages of Cash - ANSWER Advantages: typically cheapest method (interest
earned on cash is typically low). Seller gets cash immediately so don't have to deal with financing.
Disadvantages: Seller gets taxed immediately and seller can't take advantage of potential upside of
buyer stock
Advantages/Disadvantages Debt - ANSWER Advant.:Cheaper than stock and seller gets cash
immediately
Disadvant.: Increased debt for company, financing can be expensive and time consuming, Seller still
gets taxed immediately, no upside of buyer stock for seller
,Advantages/Disadvantages Stock - ANSWER Advant.: Can be cheaper if buyer has high stock price
and P/E multiple, can be faster then debt financing, seller gets to participate in potential upside of
buyer's stock price, seller isn't taxed until stock is sold
Disadvant.: More risk for seller since buyer share price could change, there may be lock-up periods
for the stock and the seller might have to hold it for a long time before selling, fixed shares vs. fixed
value could make a big impact on seller if the buyer's share price changes a lot.
Two ways of determining Cost of Equity in Merger Model? - ANSWER 1. Buyer Net Income/Buyer
Equity Value
2. the reciprocal of the Buyer's P/E multiple
Different than WACC because you are looking at Cost of Equity in terms of its impact on the
company's EPS, not the company's overall discount rate.
Weighted Cost of Acquisition Equation? - ANSWER = % Cash Used*After-Tax Cost of Cash + %Debt
Used*After-Tax Cost of Debt + %Stock Used*After-Tax Cost of Stock
Seller's "Yield" Equation - ANSWER Net Income/Purchase Equity Price
The Yield is how much Net Income you get for each $1 spent on Company B's stock.
When is a deal accretive/dilutive/neutral based on Weighted Cost of Acquisition & Seller's Yield? -
ANSWER WCA < Yield: Accretive
WCA = Yield: Neutral
WCA > Yield: Dilutive
When company A is paying less than what Company B is yielding then the deal is accretive.
When is a deal accretive/dilutive/neutral in a 100% stock deal? - ANSWER Buyer P/E > Seller P/E at
Purchase Price: Accretive
, Buyer P/E = Seller's P/E at Purchase Price: Neutral
Buyer P/E < Seller's P/E at Purchase Price: Dilutive
When the Buyer is paying less than what the Seller is yielding, EPS will be boosted
How do you calculate Forgone Interest on Cash? - ANSWER Cash used* interest rate
What tax rate should you use when calculating combined Net Income? - ANSWER the buyer's
because the seller becomes a subsidiary after it is purchased.
How do you calculate Accretion/Dilution? - ANSWER Subtract the Standalone EPS from the
Combined EPS and divide it by the Combined to get a %.
You can also subtract Standalone from Combined to get a $ value
Why might EPS not always be a meaningful metric? - ANSWER If company is private they may not
care and if acquirer has negative Net Income they it also may not care.
Issues with merger models? - ANSWER - Net Income and cash flow are very different so something
based on EPS might look great, but based on cash flow look horrible
- Merger models don't capture risk of M&A deals; All cash deals would need massive differences in
Seller's EPS being above buyer's to be dilutive
- Merger models don't reflect qualitative factors like cultural fit, the ability of management to work
together, etc., but they are critical for the deal to work.
Main factors that impact "Purchase Price" above buying a target's shares? - ANSWER 1. Treatment of
the Seller's Existing Debt
2. Treatment of Seller's Existing Cash
3. Transaction Fees, Unfunded Pensions, and Other Items
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