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Part I: M&A
Environment
Part V:
Alternative
Strategies
Motivations for
M&A
Business &
Acquisition
Plans
Public Company
Valuation
Payment &
Legal
Considerations
Business
Alliances
Regulatory
Considerations
Search through
Closing
Activities
Private
Company
Valuation
Accounting &
Tax
Considerations
Divestitures,
Spin-Offs &
Carve-Outs
Takeover Tactics
and Defenses
M&A Integration
Financial
Modeling
Techniques
Financing
Strategies
Bankruptcy &
Liquidation
Cross-Border
Transactions
Learning Objectives
Primary learning objective: Provide students with a basic
understanding of how to use financial models to value and
structure M&As
Secondary learning objectives: Provide students with a
knowledge of
How to estimate the value of synergy;
Commonly used relationships in building M&A valuation
models; and
How to use models to estimate the purchase price
range, initial offer price for a target firm, and to evaluate
the feasibility of financing the proposed offer price.
Key questions:
1.
2.
How might substitutes and new entrants affect product pricing and profit
margins?
Year 2
Year 3
Year 4
Year 5
Net Sales1
$200
$220
$242
$266
$293
Cost of sales2
$160
$176
$194
$213
$234
$2
$4
$6
$8
$8
Indirect labor
$1
$2
$4
$4
$4
Purchased materials
$2
$3
$5
$5
$5
Selling expenses
$1
$3
$5
$5
$5
$6
$12
$20
$22
$22
$154
$164
$174
$191
$212
77.0%
74.6%
71.9%
71.8%
72.4%
Total
Combined company net sales projected to grow 10% annually during forecast period.
2
Cost of sales before synergy assumed to be 80% of net sales during forecast period.
1
Discussion Questions
1. How would you adjust the combined firms income
statement for cost savings due to improved worker
productivity? (Hint: Determine the line item most
directly affected by the improvement in productivity.)
2. How would you adjust the combined firms income
statement for additional revenue generated from crossselling (i.e., Acquirer selling its products to the targets
customers and vice versa)?
3. How would you reflect the expenses incurred in
implementing the worker productivity improvement and
cross-selling programs on the combined firms income
statement?
PVMIN = PVT or PVMV, whichever is greater for a stock purchase (liquidation value of net
acquired assets for an asset purchase)
PVMAX = PVMIN + PVNS, where PVNS = PVSOV PVDOV
PVIOP = PVMIN + PVNS, where 0 1
Offer price range = (PVT or MVT) < PVIOP < (PVT or MVT) + PVNS
When share exchange ratios (SERs) are fixed, the value of the transaction can change due to fluctuations in the acquirers share price. Assume the
SER is 2 and the acquirers share price is $50, the offer price per share is $100. However, if the acquirers share price falls to $40 or increases to
$60 before closing, the offer price is $80 and $120, respectively. Under a floating SER, the dollar value of the offer price per share is fixed and
the number of shares exchanged varies with the value of the acquirers share price. Acquirer share price changes require re-estimating the SER.
For example, if the acquirers share price falls to $40, the number of new acquirer shares issued to preserve the $100 offer price is 2.5 (i.e.,
$100/$40); if the acquirers share price rises to $60, the new SER would be 1.6667 (i.e., $100/$60). Fixed SERS are most common because the
risk of changes in the offer price is shared equally by the acquirer (i.e., if acquirers share price rises) and the target (i.e., if the acquirers share
price falls).
Comment
2,000,000
In-the-Money Options1
150,000
$10,000,000
$5,000,000
$30
Calculating Post-Merger
Earnings Per Share (EPS)
Will the transaction be
transaction be dilutive or
accretive to the acquirers
EPS?
Acquirer is considering the
acquisition of Target in which
Target would receive $84.30
for each share of its common
stock. Acquirer wishes to
assess the impact of
alternative forms of payment
on post-merger EPS.
Acquirer believes that any
synergies in the first year
following closing would be
fully offset by costs incurred
in combining the two
businesses. Selected data
are presented as follows:
Pre-Merger
Data
Net
Earnings
Acquirer
Target
$281,500,000 $62,500,000
Shares
112,000,000
Outstanding
18,750,000
EPS
$2.51
$3.33
Market
Price Per
Share
$56.25
$62.50
Target has no convertible preferred stock or debt outstanding, and its employees have no in the money options..
Annual interest is computed as follows: .08 x $28.05 x 18,750,000 (Target shares) = $42,075,000
Assumptions Section
Historical Period
Forecast Period
Minimum cash balances determined by analyzing the firms cash conversion cycle or by
computing the average ratio of cash balances to net revenue over some prior period times
current net revenue..
Liabilities
Current Liabilities (CL)
Other Liabilities (OL)
Cash Outflows Exceed Cash Inflows: If (TA I)>(TL ND) + SE, ND > 0 (i.e., the
firm must borrow), otherwise ND = 0
Cash Outflows Less Than Cash Inflows: If (TA I) < (TL ND) + SE, I > 0 (i.e.,
the firms non-operating cash increases), otherwise I = 0
Cash Outflows Equal Cash Inflows: If (TA I) = (TL ND) + SE = 0, ND=I= 0
2006
Maturity
Schedule
Maturing
Amount
Interest Rate
2007
Maturing
Amount
Interest Rate
Long-Term
Debt
$690,710
$190,710
5.5%
Medium Term
$540,500
$30,500
7.5%
$30,000
7.5%
Mortgage Debt
$42,380
$694
10.15%
$767
10.15%
Total
$1,273,590
$31,194
7.559%
$221,477
5.787%
Remaining
Balance
1/1/06
Ending
Balance
Interest Rate
Ending
Balance
Interest Rate
Long-Term
Debt
$690,710
$690,710
5.5%
$500,000
5.5%
Medium Term
$540,500
$510,000
7.5%
$480,000
7.5%
Mortgage Debt
$42,380
$41,686
10.150%
$40,919
10.15%
Total
$1,273,590
$1,242,396
6.477%
$1,020,919
6.627%
Things to Remember
Financial modeling facilitates the process of
valuation, deal structuring, and selection of the
appropriate financing plan.
The process entails the following four steps:
Valuing the acquirer and target firms as
standalone businesses using multiple valuation
methods
Valuing consolidated acquirer and target firms
including the effects of net synergy
Determining the initial offer price for the target firm
from within the price range defined by the
minimum and maximum purchase prices
Determining the combined firms ability to finance
initial offer price