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Terms in this set (14)
How do you model a merger?
1. Determine terms of deal (made with, stock, cash, debt)
2. Valuation of each company, projected income statement of each company, shares outstanding for each company
3. Combined income statements of two companies with new share count to determine EPS
How does Goodwill get created?
Excess purchase price above fair market value.
GW represents value of customer relationships, secret sauces, etc.
Fair Market Value (Formula)
Equity purchase price - book value of a company (rule of thumb)
What is accretive / dilutive EPS in a M&A deal?
Accretive is when the combined EPS of the new combined company is higher than before, Dilutive is the other way around
How can you tell if a deal will be accretive or dilutive?
Rule of thumb: check PE ratios of two companies (only works if all stock deal)
If buyer has a higher PE than seller, accretive (vice versa)
If company A can buy company B with all cash, but chooses to finance with stock, why?
Maybe holding cash for economic downturn, stock may be at all time, may want to save for cash for upcoming project
What's the difference between a strategic and financial buyer?
Strategic: Same area of operations (trucking company buys warehouse storage company)
Financial: Private Equity investor looking to flip it
What's the motivation to buy a company?
Gain market share, eliminate competition, inorganic growth, undervalued seller, new customer base, intangibles of seller, cost and revenue synergies
How would a company with unlimited resources pay for a acquisition (Cash, Stock, Debt)?
Interest on cash is lower than interest on debt.
Less risky than stock
Difference between goodwill and other intangibles?
GW is not amortized, is merely checked for impairment
What is the difference between a merger and an acquisition?
Merger, companies are roughly same size
Acquisition, one is clearly larger than the other
What are synergies?
Buyer gets more value out of purchase than what the figures would suggest.
Revenue synergies: sell to more customer, sell new products to old customers
Cost synergies: Don't need two HR reps
Which synergy is most reliable?
Cost, revenue synergies are realized to a MUCH lesser extent in reality
Walk through a typical sell side M&A process:
How much debt could any given company put on a deal?
To determine, look at comparable companies and precedent transactions
Use combined company's EBITDA for D / EBITDA comps
How do you determine what to pay for any company?
Comp companies, Precedent transactions, DCF
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