Introduction to M&A - Auburn Universitywebhome.auburn.edu/~yostkev/teaching/finc56706670/notes/... · 2019-12-20 · Introduction to M&A FINC 5670/6670/6676 ‐Yost MERGER WAVES Wave

FINC 5670/6670/6676 ‐ Yost

Dr. Keven YostFINC 5670/6670/6676

Mergers and AcquisitionsCourse Packet

Spring 2020

Introduction to M&A

FINC 5670/6670/6676 ‐ Yost

M&A ACTIVITY

Introduction to M&A

MERGER WAVES

Wave #1: _________________

Economy and capital markets rebounding after depression

Rapid technological innovation

_____________ mergers

Mergers to build ______________ (or trusts)

Born: DuPont, GE

1

Introduction to M&A

FINC 5670/6670/6676 ‐ Yost

MERGER WAVES

Wave #2: _________________

Following recession

_____________ mergers

Then…

MERGER WAVES

Wave #3: _________________

Conglomerate or _____________ mergers

2

Introduction to M&A

FINC 5670/6670/6676 ‐ Yost

MERGER WAVES

Wave #4a: _________________

Breakup of conglomerates

___________ takeovers

___________

Increased involvement by foreign buyers

Featuring: RJR Nabisco MBO, Beecham Group buys SmithKline

MERGER WAVES

Wave #4b: _________________

Following recession

Strategic buyers looking for synergy

Featuring: AOL acquires Time Warner; Exxon buys Mobil

3

Introduction to M&A

FINC 5670/6670/6676 ‐ Yost

MERGER WAVES

More recently: ________________

MERGER WAVES

Similarities:

____________________

____________________

____________________

Differences:

Industry focus

Type of transaction

Presence of hostile bids

Size of deals

4

Introduction to M&A

FINC 5670/6670/6676 ‐ Yost

REASONS FOR M&A ACTIVITY

Managerial Hubris

Market Manias

Equity Valuation and Asymmetric Information

Agency Costs and Governance

Monopolistic/rent-seeking Behavior

Industry Shocks

Rational Markets Irrational Markets

Rational Managers

Irrational Managers

• Managerial Hubris

• Market Manias

• Equity Valuation and Asymmetric Information

• Agency Costs and Governance

• Industry Shocks

• Monopolistic/rent-seeking Behavior

5

Introduction to M&A

FINC 5670/6670/6676 ‐ Yost

Does M&A Pay?

Introduction to M&A

What is success?

Creating market valueFinancial stability Improved strategic positionOrganizational strengthEnhanced brand/reputationObserving the spirit of the law and ethics Improved process

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Introduction to M&A

FINC 5670/6670/6676 ‐ Yost

What does it mean to pay?

What is the goal of the firm?

What is the goal of M&A?

Net Present Value

What is the goal of the firm?

What is NPV?

What does it mean to have a zero NPV?

What does it mean to conserve value?

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Introduction to M&A

FINC 5670/6670/6676 ‐ Yost

What are we measuring?

Stock Price

Percent Return Relative to Benchmark

Percent Return Relative to No Transaction

How do we measure?

Event Studies

Accounting Studies

Surveys of Executives

Clinical Studies

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Introduction to M&A

FINC 5670/6670/6676 ‐ Yost

Statistical Significance

What do we do with a test statistic?

Statistical significance vs. economic significance

Annualized returns

The Evidence: Event Studies

Target firm shareholders:

Buyer firm shareholders:

The overall transaction:

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Introduction to M&A

FINC 5670/6670/6676 ‐ Yost

Does M&A Pay?

10

Sell‐side M&A

FINC 5670/6670/6676 ‐ Yost

Sell‐side M&ACHAPTER 6

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Sell‐side M&A

FINC 5670/6670/6676 ‐ Yost

The Backward Order of this Course

Sell‐side M&ACHAPTER 6

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Sell‐side M&A

FINC 5670/6670/6676 ‐ Yost

AuctionsPros

• Competition• ___________________

• ___________________

• Faster execution

Cons

• Information _______________

• Negative impact on employee morale

• Possible collusion

• Reduced negotiation power once winner is selected

• Possibility of a ___________________

• Significant time and resources

AuctionsBroad Auction

• Maximize universe of ________ ______________

• Neutral toward buyers• Maximize ______________

• Fewer issues of _____________ and timing

• More _______ organization and marketing

Targeted Auction

• Speed

• __________________

• Maintain particular structure

• __________________

• Less distruptive

• Risk: leaving _______ on the table

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Sell‐side M&A

FINC 5670/6670/6676 ‐ Yost

Identify Seller Objectives and Determine Appropriate Sale Process

Perform Sell‐Side Advisor Due Diligence and Preliminary Valuation Analysis

What are we looking for?

Select Buyer Universe The advisor brings…

Strategic Buyers

• Strategic fit• _______________• Culture• _______________• _______________

• Size• Balance sheet health• Access to financing• Risk tolerance

Financial Sponsors

• Investment strategy/focus• Sector expertise• Fund size• Track record• Fit with existing portfolio• Fund life cycle• Ability to obtain ______________

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Sell‐side M&A

FINC 5670/6670/6676 ‐ Yost

Prepare Marketing Materials

____________________________

____________________________ (CIM)

Prepare ____________________________

Use of information

Term

Permitted disclosures

Return of confidential information

Non‐solicitation/no hire

____________________________

Restrictions on clubbing

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Sell‐side M&A

FINC 5670/6670/6676 ‐ Yost

Contact Prospective Buyers

Negotiate and Execute __________________________________ with Interested Parties

Distribute _______________________________________ and Initial Bid Procedures Letter

•Price (range) and form of payment•Key assumptions•Structural considerations•Financing sources•Treatment of mgmt. & employees

•Timing for completion and diligence•Key conditions to closing•Required approvals•Buyer contact information

Prepare Management Presentation

Set up ____________________________

Prepare Stapled Financing Package (if applicable)

Receive Initial Bids and Select Buyers to Proceed to Second Round

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Sell‐side M&A

FINC 5670/6670/6676 ‐ Yost

Conduct ____________________________

Facilitate Site Visits

Provide Data Room Access

Due Diligence

Due Diligence is ___________.

Due diligence is part of __________________.

___________ vs. ___________scope trade‐off. In what situations might a narrower scope of due diligence be justified?

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Sell‐side M&A

FINC 5670/6670/6676 ‐ Yost

Broad due diligenceNot just

◦ Risks ………………………………………….◦ The past and present ………………...◦ The firm ……………….…………………...◦ Financial condition ….…………………◦ Internal conditions …………………….◦ Basic data of the firm ………………...

But also

◦ ____________________________◦ ____________________________◦ ____________________________◦ ____________________________◦ ____________________________◦ ____________________________

Distribute Final Bid Procedures Letter and Draft _____________________________

Receive Final Bids

•Exact Price and form of payment•Draft Definitive Agreement•Evidence of committed financing•Attest to completed due diligence•Attest that the offer is binding

•Required approvals•Board approvals•Estimated time to sign and close•Buyer contact information

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Sell‐side M&A

FINC 5670/6670/6676 ‐ Yost

Evaluate Final Bids

Negotiate with Preferred Buyer(s)

Select Winning Bidder

Render ____________________________ (if required)

Receive Board Approval and Execute Definitive Agreement

Obtain Necessary Approvals

_____________ Approval

Hart‐Scott‐Rodino Antitrust Improvements Act of 1976 (HSR Act)

Others?

_____________ Approval

Financing and Closing

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Sell‐side M&A

FINC 5670/6670/6676 ‐ Yost

Negotiated Sales vs. AuctionsPros

• ____________

• More _____________

• Less disruptive to business

• Greater _________________

Cons

• Seller has less leverage

• May leave ___________ on the table

• Maybe more likely to share sensitive data with competitor

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Buy‐side M&A

FINC 5670/6670/6676 ‐ Yost

BUY-SIDE M&A Chapter 7

THE AGENDA

o Motivation to buy

o Acquisition Strategies

o Financing

o Deal Structure

o Valuation

o Merger Consequences Analysis

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Buy‐side M&A

FINC 5670/6670/6676 ‐ Yost

WHY BUY?

o Less risky than ______________, or building from scratch

o Synergies

o ______

o ________

ACQU

ISIT

ION

STRA

TEGI

ES

o Horizontal

o Vertical

o ___________

What:

Pros: ●Cons: ●

What:

Pros: ●●

Cons: ●●

What:

Pros: ●●

Cons: ●●●

Potential for higher ___________Is bigger better?

Control over raw material & _________________Improved ______________Lose price competition and innovation for inputsHarder to manage

Take advantage of best practices or abilities__________________Inefficient internal capital marketsHarder to manageLess transparency/more __________________

22

Buy‐side M&A

FINC 5670/6670/6676 ‐ Yost

FINA

NCIN

Go Cash

o Debt

o Equity

• Revolver• Quarterly interest, floating rate

• Commercial Paper• Short-term, zero coupon

• Term Loan• Amortized, quarterly payments

• Bond/note• Semiannual interest, principal at maturity

• When might it be good for acquirers? • When might it be bad for acquirers?

• When might it be good for targets?• When might it be bad for targets?

WHICH IS BETTER FOR THE FIRM WHEN IT COMES TO…?Debt Equity

EPS Accretion

Cost of Capital

Tax Deductibility

Return on Equity

Balance Sheet Flexibility

No Required Payments

Credit Rating Health

Lack of Covenants

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Buy‐side M&A

FINC 5670/6670/6676 ‐ Yost

DEAL STRUCTUREo Stock Sale

o Target shareholders sell their stock

o Acquirer assumes ______________

o Target shareholders’ tax effects:

o If sold for cash:

o If sold for acquirer’s stock:

DEAL

STR

UCTU

RE:

GOOD

WIL

L &

DTLs o Goodwill

o Why does it exist?

o How is it calculated?

o US GAAP Accounting Treatment:

o Deferred Tax Liabilities

o Why do they exist?

o How is it calculated?

= Purchase price – identifiable tangible & intangible assets + DTLs

= Write up x tax rate

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Buy‐side M&A

FINC 5670/6670/6676 ‐ Yost

EXAMPLE: GOODWILL AND DTLYost Rocks, Inc. is a landscape supply company based in Boring, Oregon. It is acquiring, through a stock purchase, Baby Turf, LLC. Information is provided below. Calculate the deferred tax liability and goodwill created with this transaction.

Assumptions $ in millions (except per share)

Baby Turf Current Share Price $43.50

Premium Offered per Share 35.0%

Fully Diluted Shares Outstanding (Baby Turf) 80.0

Total Debt (Baby Turf) 1,500.0

Cash and Cash Equivalents (Baby Turf) 250.0

Net Identifiable Assets (Baby Turf) 2,500.0

Allocation of Purchase Price Premium to Tangible Assets 15.0%

Allocation of Purchase Price Premium to Intangible Assets 10.0%

Yost Rocks, Inc. Marginal Tax Rate 38.0%

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Buy‐side M&A

FINC 5670/6670/6676 ‐ Yost

DEAL STRUCTURE

o Asset Sale o Target sells some or all of its assetso Target firm remainso Future liabilities _________________

o Goodwill vs. Depreciation Tax Shield

o Tax effects:

o For the acquirer:

o For the target:

EXAMPLE: ASSET SALE AND TAXESAssumptions

Purchase Price = $2 billion Amortization Period = 15 years

Asset Basis = $500 million Marginal Tax Rate = 38%

Discount Rate = 10% Capital Gains Rate = 15%

Seller

Stock Sale Asset Sale

Purchase Price

Asset Base

Capital Gain

Corporate Taxes

Gain to Shareholders

Personal Taxes

Net Proceeds

Buyer

Purchase Price

Tax Benefits

Net Purchase Price

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Buy‐side M&A

FINC 5670/6670/6676 ‐ Yost

DEAL STRUCTURE

o Stock Deals Treated as Asset Deals for Tax Purposes

o 338(h)(10) Election

WHICH IS LIKELY?Stock Sale Asset Sale 338(h)(10) Election

Shareholders are Sellers

Corporate Entity is Seller

Double Taxation Potential

Seller Transfers All Assets & Liabilities

Execution Simplicity

Asset Step-up for Accounting Purposes

Asset Step-up for Tax Purposes

Common for Large Public Companies

Common for Subsidiary Sales

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Buy‐side M&A

FINC 5670/6670/6676 ‐ Yost

VALUATON

o The Football Field

o Analysis at Various Prices (AVP) or Valuation Matrix

o Contribution Analysis

Company A Preliminary Valuation

DCF range is derived using 8.5% - 9.5% WACC and 1.5% - 2.5% Perpetuity Growth Rate, assuming 5.0% Sales Growth and 10% EBITDA Growth

Entry Multiple range; 11.5x – 12.5x

Exit Multiple of 12.0x

Target IRR of 20% - 25%

Range of 11.0x – 13.0x

Range of 9.0x – 12.0x

$1,898

$2,320

$2,426

$2,302

$2,531

$2,742

$2,636

$3,034

$1,500 $1,700 $1,900 $2,100 $2,300 $2,500 $2,700 $2,900 $3,100

Methodology Implied Enterprise Value (1) Key Assumptions

Discounted Cash Flow Analysis

Leveraged Buyout Analysis

Selected Precedent Transactions Analysis

Trading Comparables Analysis

(1) Enterprise Value based on 2014E LTM Adjusted EBITDA of $211 million (XXXXXXXXXXXXXXXXX)

6

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Buy‐side M&A

FINC 5670/6670/6676 ‐ Yost

BALANCE SHEET EFFECTS

o Determine Price and Payment

o Asset Write-ups

o The Impact of Goodwill

o Deferred Tax Liability

o The Impact on Credit

INCOME STATEMENT EFFECTSo The Impact of Asset Write-ups:

o On depreciation:

o On deferred tax liabilities:

o The Impact on EPS

o If ↑:

o If ↓:

o To increase accretion:

29

Buy‐side M&A

FINC 5670/6670/6676 ‐ Yost

Acquirer Target Adjustments NewDec. 31, 2016 Sept. 25, 2016

ASSETS

Current assets:

Cash and cash equivalents 19,334$ 473$

Marketable securities 6,647 379

Inventories 11,461 517

Accounts receivable, net and other 8,339 242

Other current assets ‐ 364

Total current assets 45,781 1,975

Property and equipment, net 29,114 3,442

Goodwill 3,784 710

Other assets 4,723 214

Total assets 83,402$ 6,341$

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable 25,309$ 307$

Accrued expenses and other 13,739 407

Unearned revenue 4,768 ‐

Current installment of long‐term debt 3

Other current liabilities 624

Total current liabilities 43,816 1,341

Long‐term debt 7,694 1,048

Other long‐term liabilities 12,607 728

Stockholders' equity:

Common stock 5 2,933

Treasury stock, at cost (1,837) (2,026)

Additional paid‐in capital 17,186 ‐

Accumulated other comprehensive loss (985) (32)

Retained earnings 4,916 2,349

Total stockholders' equity 19,285 3,224

Total liabilities and stockholders' equity 83,402$ 6,341$

Bal

ance

She

et

Acquirer Target Adjustments New2016 2016

Net product sales 94,665$ 15,724$

Net service sales 41,322

Total net sales 135,987 15,724

Operating expenses:

Cost of sales 88,265 10,313

Fulfillment 17,619

Marketing 7,233

Technology and content 16,085

General and administrative 2,432 4,477

Other operating expense, net 167 77

Total operating expenses 131,801 14,867

Operating income 4,186 857

Interest income 100

Interest expense (484) (41)

Other income (expense), net 90 11

Total non‐operating income (expense) (294) (30)

Income before income taxes 3,892 827

Provision for income taxes (1,425) 320

Equity‐method investment activity, net of tax (96)

Net income 2,371$ 507$

Basic earnings per share 5.01$ 1.55$

Diluted earnings per share 4.90$ 1.55$

Weighted‐average shares used in EPS

Basic 474 326.1

Diluted 484 326.9

Inco

me

Sta

tem

ent

30

Review for Exam #1

FINC 5670/6670/6676 ‐ Yost

REVIEW FOR EXAM #1

EXAM #1THURSDAY, FEBRUARY 6TH

IN-CLASS (1 HOUR 15 MINUTES)

• FOR ONLINE STUDENTS: FRIDAY THROUGH MONDAY

(DEADLINE: MONDAY, 2/10)

• DON’T FORGET:• FINANCIAL CALCULATOR

• A BLACK PEN (PREFERABLY)• REMINDER ABOUT THE BACK SIDE

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Review for Exam #1

FINC 5670/6670/6676 ‐ Yost

THINGS TO DO…

• STUDY BOTH THE NOTES AND THE BOOK.

• END OF CHAPTER PROBLEMS.

• HAVE A CALCULATOR FOR CALCULATIONS.

• GET HELP IF YOU ARE HAVING PROBLEMS.

HELP!

• OFFICE HOURS

• TUESDAYS AND THURSDAYS

• 8:00 AM – 9:00 AM• OR BY APPOINTMENT

• YOU CAN ASK QUESTIONS UP TO YOUR EXAM TIME

32

Review for Exam #1

FINC 5670/6670/6676 ‐ Yost

EXAM CONTENT AND STRUCTURE

WARNING

THE FOLLOWING MAY NOT CONTAINEVERYTHING WE COVERED, AND

THEREFORE, MAY NOT CONTAIN ALLTESTABLE MATERIAL.

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Review for Exam #1

FINC 5670/6670/6676 ‐ Yost

INTRODUCTION TO M&A:M&A ACTIVITY

• MERGER WAVES

• CHARACTERISTICS

• COMMONALITIES AND DIFFERENCES

• REASONS FOR M&A ACTIVITY

• RATIONALITY OF MANAGERS AND MARKETS

INTRODUCTION TO M&A:DOES M&A PAY?• WHAT DOES IT MEAN TO PAY? CONSERVE VALUE?• WHAT ARE WE MEASURING (AND WHAT DO WE

WANT TO MEASURE)?• HOW DO WE MEASURE?• THE EVIDENCE FROM EVENT STUDIES

(FOR TARGETS, ACQUIRERS, COMBOS)• DOES M&A PAY?

YES? NO? IT DEPENDS? WE DON’T KNOW?

34

Review for Exam #1

FINC 5670/6670/6676 ‐ Yost

CASE: BEN & JERRY’S HOMEMADE

• WHAT IS THE GOAL OF THE FIRM?• HOW DID BEN & JERRY’S BECOME A TAKEOVER

TARGET?• WHAT IS THE FIDUCIARY DUTY OF HENRY MORGAN

AND WHAT ARE THE CHALLENGES IN FULFILLING IT?• THE RIGHT AND WRONG WAY TO REVIEW THE CASE

FOR THIS EXAM

SELL-SIDE M&A

• CHAPTER 6• POSSIBLE OBJECTIVES OF SELLER

• PROS AND CONS OF AUCTIONS

• BROAD AUCTIONS VERSUS TARGETED AUCTIONS

• THE STAGES OF AN AUCTION PROCESS

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Review for Exam #1

FINC 5670/6670/6676 ‐ Yost

SELL-SIDE M&A - CONTINUED

• THE DOCUMENTS OF AN AUCTION PROCESS(TEASER, CIM, CONFIDENTIALITY AGREEMENT, STAPLED FINANCINGPACKAGE, DEFINITIVE AGREEMENT, FAIRNESS OPINION)

• DUE DILIGENCE

• WHAT IT IS

• BROAD-SCOPE VERSUS NARROW-SCOPE

• PROS AND CONS OF NEGOTIATED SALES

GUEST SPEAKER: _____________________

• WHAT COULD KEVEN ASK ABOUT THIS?

36

Review for Exam #1

FINC 5670/6670/6676 ‐ Yost

BUY-SIDE M&A

• CHAPTER 7• MOTIVATIONS TO BUY

(SYNERGIES)• ACQUISITION STRATEGIES

(HORIZONTAL, VERTICAL, CONGLOMERATE)• TYPES OF FINANCING AND THEIR COSTS/BENEFITS/EFFECTS

BUY-SIDE M&A - CONTINUED• DEAL STRUCTURE: STOCK SALE VERSUS ASSET SALE

• PROS AND CONS (ACCOUNTING AND TAX EFFECTS)• GOODWILL

• DTLS

• PROCEEDS FROM STOCK SALE VERSUS ASSET SALE

• VALUATION

• MERGER CONSEQUENCES ANALYSIS• BALANCE SHEET EFFECTS

• INCOME STATEMENT EFFECTS

37

Review for Exam #1

FINC 5670/6670/6676 ‐ Yost

GUEST SPEAKER: _____________________

• WHAT COULD KEVEN ASK ABOUT THIS?

QUESTIONS ANDPRACTICE PROBLEMS

38

Review for Exam #1

FINC 5670/6670/6676 ‐ Yost

PRACTICE PROBLEM #1BEEME CORP. IS A REGIONAL HONEY PRODUCTION COMPANYTHAT IS IN THE PROCESS OF PURCHASING FREE ME, INC., ANORGANIC FOODS DISTRIBUTOR, FOR $25 PER SHARE. FREEME, INC. HAS NET IDENTIFIABLE ASSETS OF $180,000 AND23,000 SHARES OUTSTANDING. BEEME CORP. EXPECTS TOALLOCATE 10 PERCENT OF THE ALLOCABLE PURCHASE PRICEPREMIUM TO THE WRITE-UP OF INTANGIBLE ASSETS AND 15 PERCENT OF THE ALLOCABLE PURCHASE PRICE PREMIUM TOTHE WRITE-UP OF TANGIBLE ASSETS. BEEME’S MARGINAL TAXRATE IS 40 PERCENT. CALCULATE GOODWILL.

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Review for Exam #1

FINC 5670/6670/6676 ‐ Yost

PRACTICE PROBLEM #2AS A SELL-SIDE ANALYST, YOU ARE NEGOTIATING THESALE OF A C CORP. THE OFFERED PRICE IS $130 MILLION AND YOUR FIRM HAS BOTH AN INSIDE BASIS(ASSET BASIS) AND OUTSIDE BASIS (STOCK BASIS) OF $40 MILLION. YOUR FIRM’S MARGINAL TAX RATE IS 40 PERCENT AND SHAREHOLDERS’ INDIVIDUAL CAPITALGAINS TAX RATE IS 15 PERCENT. HOW MUCH MORE NETPROCEEDS WILL YOUR SHAREHOLDERS RECEIVE IN ASTOCK SALE THAN IN AN ASSET SALE?

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Comparable Companies Analysis

FINC 5670/6670/6676 ‐ Yost

Comparable Companies

AnalysisChapter 1

Trading Comps

■ How They Work

■ Pros and Cons

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FINC 5670/6670/6676 ‐ Yost

The Process

■ Step 1: Select the Universe of Comparable Companies

■ Step 2: Locate the Necessary Financial Information

■ Step 3: Spread the Key Statistics, Ratios, and Trading Multiples

■ Step 4: Benchmark the Comparable Companies

■ Step 5: Determine Valuation

Select the Universe of Comparable Companies

■ Study the Target

■ Identify Key Characteristics

● _____________ Profile ● ___________ Profile

■ Screen for Comparable Companies

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FINC 5670/6670/6676 ‐ Yost

Business Profile

■ Sector

■ SIC Code = 2082 - Malt Beverages

■ NAICS = 312120 – Breweries

■ Others (BICS, S&P, etc.)

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FINC 5670/6670/6676 ‐ Yost

Business Profile

■ Sector

■ Products and Services

■ Customers and End Markets

■ Distribution Channels

■ Geography

Financial Profile

■ Size

■ Profitability

■ Growth Profile

■ Return

■ Credit Profile

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FINC 5670/6670/6676 ‐ Yost

Select the Universe of Comparable Companies

■ Study the Target

■ Identify Key Characteristics

■ Screen for Comparable Companies

The Process

Step 1: Select the Universe of Comparable Companies

Step 2: Locate the Necessary Financial Information

■ Step 3: Spread the Key Statistics, Ratios, and Trading Multiples



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FINC 5670/6670/6676 ‐ Yost

SEC Filings

■ 10-K

■ 10-Q

■ 8-K

■ Schedule 14A

■ EDGAR (www.sec.gov)

Other Sources of Information■ Equity Research Reports

■ Consensus Estimates

■ Press Releases and News

■ Financial Information Services– Bloomberg– FactSet– Moody’s, S&P, Value Line

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FINC 5670/6670/6676 ‐ Yost

The Process



Step 3: Spread the Key Statistics, Ratios, and Trading Multiples



Calculating Value: Equity Value■ How do we do it?

■ What is fully diluted shares outstanding?

■ How do we calculate it?– Treasury Stock Method– If-Converted Method– Net Share Settlement

= price per share x fully diluted shares outstanding

basic “in the money” “in the money”= shares + options & + convertible

outstanding warrants securities

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FINC 5670/6670/6676 ‐ Yost

Treasury Stock Method –Options and Warrants

Assumptions

Current Share Price $40.00

Basic Shares Outstanding 300.0

Exercisable Options 10.0

Weighted Average Exercise Price $26.00

($ in millions, except per share data; shares in millions) Calculation of Fully Diluted Shares Using the TSM

Option Proceeds

Current Share Price

Shares Repurchased form Option Proceeds

Shares from In-the-Money Options

Less: Shares Repurchased from Option Proceeds

Net New Shares from Options

Plus: Basic Shares Outstanding

Fully Diluted Shares Outstanding

Treasury Stock Method –Options and Warrants :

Assumptions





($ in millions, except per share data; shares in millions)

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FINC 5670/6670/6676 ‐ Yost

Treasury Stock Method –Options and Warrants : Another Example

Assumptions





($ in millions, except per share data; shares in millions)

If-Converted Method–Convertible Debt

Assumptions

Company



Convertible Security

Amount Outstanding $150.0

Conversion Price $15.00

($ in millions, except per share data; shares in millions) Calculation Using the If-Converted Method

Amount Outstanding

Conversion Price

Incremental Shares

Basic Shares Outstanding

Plus: Net New Shares from Options

Plus: Incremental Shares from Convertibles

Fully Diluted Shares Outstanding

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FINC 5670/6670/6676 ‐ Yost

Net Share Settlement Method–Convertible Debt

Assumptions

Company



Convertible Security

Amount Outstanding $150.0

Conversion Price $15.00

($ in millions, except per share data; shares in millions) Calculation Using the Net Share Settlement Method

Amount Outstanding

Conversion Price

Total Incremental Shares

X Current Share Price

Total Conversion Value

Less: Par Value of Amount Outstanding

Excess Over Par

Current Share Price

Incremental Shares Using NSS

Calculating Value: Enterprise Value

= + + + ̶EquityValue

TotalDebt

PreferredStock

Non-controllingInterests

Cash & CashEquivalents

■ ________________ of changes in _____________________

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FINC 5670/6670/6676 ‐ Yost

■ Size

■ Profitability

■ Growth Profile

■ Return

■ Credit Profile

Financial Profile

■ Size

■ Sales

■ Gross Profit

■ EBITDA

■ EBIT

■ Net Income

■ Size

■ Profitability

Financial Profile■ Gross Profit Margin

■ EBITDA and EBIT Margin

■ Net Income (Profit) Margin

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FINC 5670/6670/6676 ‐ Yost

■ Size

■ Profitability

■ Growth Profile

■ Return

Financial Profile■ Return on Invested Capital

■ Return on Equity

■ Return on Assets

■ Dividend Yield

■ Size

■ Profitability

■ Growth Profile

■ Return

■ Credit Profile

Financial Profile■ Leverage Ratio

■ Capitalization Ratio

■ Interest Coverage Ratio

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FINC 5670/6670/6676 ‐ Yost

Adjusting Financials:Calculating LTM Data

= + –

Q1 Q2 Q3 Q4 Q1

Prior Fiscal Year

Plus: Current Stub

Less: Prior Stub

LTM

■ LTM = Prior Fiscal Year + Current Stub – Prior Stub

Q1 Q2 Q3 Q4 Q1

Prior Fiscal Year

Plus: Current Stub

Less: Prior Stub

LTM

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FINC 5670/6670/6676 ‐ Yost

Adjusting Financials:Calendarization of Data

𝑚𝑜𝑛𝑡ℎ # 𝑥 𝐹𝑌𝐴 𝑆𝑎𝑙𝑒𝑠12

12 𝑚𝑜𝑛𝑡ℎ # 𝑥 𝑁𝐹𝑌 𝑆𝑎𝑙𝑒𝑠12

Calendar Year Sales

Adjusting Financials:Non-recurring Items and Recent Events■ Normalize

– _______________ or sanitizing financials

■ 10Ks and 10Qs– MDA and footnotes

■ Key words: Non-recurring, unusual, one-time, extraordinary

■ Key causes: Write-offs, restructurings, changes in accounting principles, gains on asset sales, litigation

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FINC 5670/6670/6676 ‐ Yost

Adjusting Financials:Non-recurring Items and Recent Events

■ Examples:– ___________________

– ___________________

■ Equity Value Multiples

■ Enterprise Value Multiples

■ Sector-specific Multiples

Calculate Trading Multiples■ Price-to-Earnings Ratio

■ Equity Value-to-Net Income Multiple

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FINC 5670/6670/6676 ‐ Yost




Calculate Trading Multiples■ Enterprise Value-to-EBITDA

■ Enterprise Value-to-EBIT

■ Enterprise Value-to-Sales

The Process




Step 4: Benchmark the Comparable Companies


56


FINC 5670/6670/6676 ‐ Yost

The Process




Step 4: Benchmark the Comparable Companies

Step 5: Determine Valuation

57


FINC 5670/6670/6676 ‐ Yost


Pros■ __________________

■ Relativity

■ Quick and convenient

■ __________________

Cons■ Market-based

■ Absence of relevant _____________

■ Potential disconnect from ________

■ Company specific issues

58

Precedent Transactions Analysis

FINC 5670/6670/6676 ‐ Yost

PRECEDENT TRANSACTIONS ANALYSISChapter 2

THE PROCESSStep 1: Select the Universe of Comparable Acquisitions

Step 2: Locate the Necessary Deal-related and Financial Information

Step 3: Spread the Key Statistics, Ratios, and Transaction Multiples

Step 4: Benchmark the Comparable Acquisitions


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FINC 5670/6670/6676 ‐ Yost

SELECT THE UNIVERSE OF COMPARABLE ACQUISITIONS

Screen for Comparable Acquisitions

Examine Other Characteristics

OTHER CHARACTERISTICSMarket Conditions

Deal Dynamics

Strategic buyer vs. financial sponsor?

Motivation for the sale?

Sale process and nature of the deal?

Purchase consideration?Stock vs. Cash?

60


FINC 5670/6670/6676 ‐ Yost

FILINGSProxy Statement (Schedule 14A)

Schedule TO/Schedule 14D-9

Registration Statement/Prospectus (S-4, 424B)

Schedule 13E-3

FILINGS (CONTINUED)

8-K

10K and 10Q

Equity and Fixed Income Research Reports

What about private targets?

61


FINC 5670/6670/6676 ‐ Yost






CALCULATING VALUE: EQUITY VALUE

What is different from comparable companies analysis?

62


FINC 5670/6670/6676 ‐ Yost

PURCHASE CONSIDERATION

All-cash Transaction

Stock-for-stock Transaction

Cash/stock Mix Transaction

PURCHASE CONSIDERATIONStock-for-stock TransactionFixed Exchange Ratio

Target assume risk if ___________________________________

Target benefits if ______________________________________

Floating Exchange RatioFixed Price# shares based on average of acquirer’s pre-close price

𝐸𝑅𝑂𝑓𝑓𝑒𝑟 𝑃𝑟𝑖𝑐𝑒

𝐴𝑐𝑞𝑢𝑖𝑟𝑒𝑟 𝑠 𝑆ℎ𝑎𝑟𝑒 𝑃𝑟𝑖𝑐𝑒

63


FINC 5670/6670/6676 ‐ Yost

PURCHASE CONSIDERATION

Cash/stock Mix Transaction

= + xCash

per ShareExchange

RatioAcquirer’s

Share PriceOffer Priceper Share

=Offer Priceper Share

Equity Value x# Fully Diluted

Shares Outstanding

CALCULATING VALUE: ENTERPRISE VALUE

What is different from comparable companies analysis?

= + + + ̶EquityValue

TotalDebt

PreferredStock

Non-controllingInterests

Cash & CashEquivalents

EnterpriseValue

+“Unaffected”Share Price

PremiumPaid

x# Fully Diluted

Shares Outstanding

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FINC 5670/6670/6676 ‐ Yost




CALCULATE TRANSACTION MULTIPLES

■ Price-to-Earnings Ratio

■ Equity Value-to-Net Income Multiple




CALCULATE TRANSACTION MULTIPLES

■ Enterprise Value-to-EBITDA

■ Enterprise Value-to-EBIT

■ Enterprise Value-to-Sales

65


FINC 5670/6670/6676 ‐ Yost

CALCULATE MULTIPLESPremiums Paid

= percent above _________________ share price

1

SynergiesMultiples based on LTM, excluding _________________






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FINC 5670/6670/6676 ‐ Yost

PRECEDENT TRANSACTIONS ANALYSISPros___________________

Current

Relativity

Simplicity

Objectivity

ConsMarket-based

Time _____________

Existence of __________________ acquisitions

Availability of _________________

Acquirer’s basis for ____________

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FINC 5670/6670/6676 ‐ Yost

Discounted Cash Flow AnalysisChapter 3

DCF: The Big Picture

• Intrinsic value =

• Intrinsic value versus market value

•Especially useful if:

•Caution:

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FINC 5670/6670/6676 ‐ Yost



•You have forecasted free cash flows over the next five years (in millions) of $100, $125, $150, $160, and $165, respectively, with a perpetual growth rate thereafter of 3%. You have also estimated a 9% WACC. What is your estimate of firm value?

69


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FINC 5670/6670/6676 ‐ Yost

The Process

•Step 1: Study the Target and Determine Key Performance Drivers

•Step 2: Project Free Cash Flow

•Step 3: Calculate Weighted Average Cost of Capital

•Step 4: Determine Terminal Value

•Step 5: Calculate Present Value and Determine Valuation

Study the Target and Determine Key Performance Drivers

•Know the target

•Key drivers

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FINC 5670/6670/6676 ‐ Yost

Calculating Free Cash Flow

•What is FCF?

•Time Horizon

•Scenario Analysis

Projections

•Sales

•COGS

•SG&A Expenses

•EBITDA or EBIT

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FINC 5670/6670/6676 ‐ Yost

Projections

•Taxes

•Depreciation and Amortization• Can differ between GAAP and tax statements

• Can build detailed PPE schedule or use a percent of sales or capex

• Where do we find it?

•Capital Expenditures• Where do we find it?

Changes in Net Working Capital

•What?

•Why?

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FINC 5670/6670/6676 ‐ Yost

Net Working Capital

•Accounts Receivable• Days Sales Outstanding (DSO) =

• Inventory• Days Inventory Held (DIH) = • Inventory Turnover =

•Other Current Assets

Net Working Capital

•Accounts Payable• Days Payable Outstanding (DPO) =

•Other Current Liabilities

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FINC 5670/6670/6676 ‐ Yost

Calculating WACC

•What is it?•How do we calculate it?

•Capital Structure•Cost of Debt

Estimating the Cost of Equity

•The CAPM

•How do we get rf?•How do we get the market risk premium (MRP)?

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FINC 5670/6670/6676 ‐ Yost

Estimating Beta

• How do we get Β?

• Raw vs. adjusted

• Private firms

• Unlevering and relevering betas:

• Other factors (e.g., size)

𝐶𝑜𝑣 ,

σ

ΒΒ

1 𝐷𝐸 1 𝑡

Β Β 1𝐷𝐸

1 𝑡

Terminal Value

•Exit Multiple Method (EMM)• Terminal Value = • Assumption:

•Perpetuity Growth Method (PGM)• Terminal Value = • Assumption:

𝐹𝐶𝐹 1 𝑔𝑟 𝑔

𝐸𝐵𝐼𝑇𝐷𝐴 𝐸𝑥𝑖𝑡 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑒

76


FINC 5670/6670/6676 ‐ Yost

Checking the Consistency

•PGM EMM

• If mid-year discounting:

𝐼𝑚𝑝𝑙𝑖𝑒𝑑 𝐸𝑥𝑖𝑡 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑒𝑇𝑉

𝐸𝐵𝐼𝑇𝐷𝐴

𝐼𝑚𝑝𝑙𝑖𝑒𝑑 𝐸𝑥𝑖𝑡 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑒𝑇𝑉 1 𝑊𝐴𝐶𝐶 .

𝐸𝐵𝐼𝑇𝐷𝐴


•EMM PGM 𝑇𝑉𝐹𝐶𝐹 1 𝑔

𝑟 𝑔

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FINC 5670/6670/6676 ‐ Yost


•EMM PGM

• If mid-year discounting:

𝐼𝑚𝑝𝑙𝑖𝑒𝑑 𝑃𝑒𝑟𝑝𝑒𝑡𝑢𝑖𝑡𝑦 𝐺𝑟𝑜𝑤𝑡ℎ 𝑅𝑎𝑡𝑒𝑇𝑉 𝑊𝐴𝐶𝐶 𝐹𝐶𝐹

𝑇𝑉 𝐹𝐶𝐹

𝐼𝑚𝑝𝑙𝑖𝑒𝑑 𝑃𝑒𝑟𝑝𝑒𝑡𝑢𝑖𝑡𝑦 𝐺𝑟𝑜𝑤𝑡ℎ 𝑅𝑎𝑡𝑒𝑇𝑉 𝑊𝐴𝐶𝐶 𝐹𝐶𝐹 1 𝑊𝐴𝐶𝐶 .

𝑇𝑉 𝐹𝐶𝐹 1 𝑊𝐴𝐶𝐶 .

Valuation

•Mid-year Convention

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FINC 5670/6670/6676 ‐ Yost

Valuation

•Enterprise Value

• Implied Equity Value

• Implied Share Price


Pros• _____________-based

• Market ____________

• Self-sufficient

• _______________

Cons• Dependence on financial projections

• Sensitivity to ________________

• __________________________

• Assumes constant _________ ________________

79

Review for Exam #2

FINC 5670/6670/6676 ‐ Yost

Review for Exam #2

The Big Picture

About M&A• Sell-side M&A• Buy-side M&A

Valuation• Comparable Companies• Precedent Transactions• Discounted Cash Flow• LBO

80

Review for Exam #2

FINC 5670/6670/6676 ‐ Yost

Thursday, March 5th

In-class (1 hour 15 minutes)

• For online students: Friday through Monday(deadline: Monday, 3/9)

• Don’t Forget:• Financial Calculator• A Black Pen (preferably)• Reminder about the back side

Things To Do…

• Study both the notes and the book.

• End of chapter problems.

• Have a calculator for calculations.

• Get help if you are having problems.

81

Review for Exam #2

FINC 5670/6670/6676 ‐ Yost

HELP!•Office Hours

• Tuesdays and Thursdays• 8:00 AM – 9:00 AM• or by appointment

• You can ask questions up to your exam time

Exam #2 Format and Content

82

Review for Exam #2

FINC 5670/6670/6676 ‐ Yost

Warning

The following may not contain everything we covered, and

therefore, may not contain all testable material.


83

Review for Exam #2

FINC 5670/6670/6676 ‐ Yost

Comparable Companies• How to estimate value with multiples

• How to select comparable companies

• Where to find information

• Full diluted shares outstanding (TSM/If-converted, NSS)

• Equity value and enterprise value

• Spreading the statistics (size, profitability, return, credit)

Comparable Companies – cont.• Fiscal year vs. LTM

• Calendarization

• Normalization (non-recurring items)

• Calculate trading multiples (equity, EV)

Pros and cons

84

Review for Exam #2

FINC 5670/6670/6676 ‐ Yost

Precedent Transactions• How to select comparable acquisitions

• Where to find information

• Purchase consideration (cash, stock-for-stock)

• Fixed and floating exchange ratios

• Calculate transaction multiples (equity, EV)

Precedent Transactions – cont.• Premiums paid

• Synergies

• Pros and cons

85

Review for Exam #2

FINC 5670/6670/6676 ‐ Yost

Discounted Cash Flow• What is free cash flow

• Projecting free cash flow (and its components)

• Calculating WACC

• The CAPM

• Levered and Unlevered Betas

Discounted Cash Flow – cont.• Terminal value (EMM and PGM)

• Discounting (end-of-year, mid-year)

• Pros and cons

86

Review for Exam #2

FINC 5670/6670/6676 ‐ Yost

Discounting Example1 2 3 4 5

$100 $200 $300 $400 $500

87

Leveraged Buyouts

FINC 5670/6670/6676 ‐ Yost

Leveraged BuyoutsChapter 4

The Basic Idea: Thinking about the DuPont Identity

88

Leveraged Buyouts

FINC 5670/6670/6676 ‐ Yost

The Basic Idea: Another LookFirm A Firm B

Debt $600.00 $0.00Equity 400.00 1,000.00Assets $1,000.00 $1,000.00

EBIT $200.00 $200.00- InterestEBT- TaxesNet IncomeROE

LBOs: The Agenda• Participants• Characteristics of a Strong LBO Candidate

• Economics of LBOs

• Primary Exit/Monetization Strategies

• Financing

89

Leveraged Buyouts

FINC 5670/6670/6676 ‐ Yost

LBO Participants• Financial Sponsors

• Investment Banks

• Bank and Institutional Lenders

• Bond Investors

• Target Management

Financial Sponsors• Raise money from __________________________

• Funds structured as _________________________

• Vary in _____________________________________

• Perform ____________________________________

90

Leveraged Buyouts

FINC 5670/6670/6676 ‐ Yost

Investment Banks• Recall from sell-side and buy-side analyses

• Perform ____________________________________

• Advise sponsor on best _____________________

• Provide ____________________________________

• They do NOT plan to ________________________

Bank and Institutional Lenders

• Perform ____________________________________

• Want ______________________________________

• Attend _____________________________________

91

Leveraged Buyouts

FINC 5670/6670/6676 ‐ Yost

Bond Investors• Buy ________________________________________

• Attend _____________________________________

• Receive ____________________________________

Target Management• Perhaps the most important _________________

• Remain invested to _________________________

92

Leveraged Buyouts

FINC 5670/6670/6676 ‐ Yost

LBOs: The Agenda• Participants

• Characteristics of a Strong LBO Candidate• Economics of LBOs


• Financing

Strong LBO Candidate Have…• Strong ________________ generation

• Strong market positions

93

Leveraged Buyouts

FINC 5670/6670/6676 ‐ Yost

Strong LBO Candidate Have…• Strong ________________________

• Strong opportunities to enhance ______________

continued

Strong LBO Candidate Have…• Low _____________ requirements

• Strong asset bases

continued

94

Leveraged Buyouts

FINC 5670/6670/6676 ‐ Yost

Strong LBO Candidate Have…• Strong __________________ teams

continued


• Characteristics of a Strong LBO Candidate

• Economics of LBOs• Primary Exit/Monetization Strategies

• Financing

95

Leveraged Buyouts

FINC 5670/6670/6676 ‐ Yost

Economics of LBOs• How LBOs generate returns

Economics of LBOs• How to measure returns

• IRR

• Cash return

96

Leveraged Buyouts

FINC 5670/6670/6676 ‐ Yost




• Primary Exit/Monetization Strategies• Financing

Primary Exit/Monetization Strategies• ____________________

• ____________________

• Recapitalize

• Distressed debt repurchase

97

Leveraged Buyouts

FINC 5670/6670/6676 ‐ Yost





• Financing

Financing Structure• Risk is impacted by:

• ______________ of debt• ______________ of debt• ______________ of debt

• Default risk

98

Leveraged Buyouts

FINC 5670/6670/6676 ‐ Yost

Financing Terminology• Security

• Seniority• Contractual

vs. • Structural

Financing Terminology• Maturity

• Coupon• Bank debt:• Bonds:

• Call Protection

continued

99

Leveraged Buyouts

FINC 5670/6670/6676 ‐ Yost

Financing Terminology• Bank Debt Covenants

• Financial Maintenance Covenants

• Affirmative Covenants

• Negative Covenants

• High Yield Bonds Covenants• Incurrence Covenants

continued

Financing Terminology• Term Sheets

continued

100

Leveraged Buyouts

FINC 5670/6670/6676 ‐ Yost

Financing Sources• Bank Debt

• Revolving Credit Facility

• Asset-based Lending (ABL) Facility

Financing Sources• Term Loan Facility

• Amortizing Term Loan

• Institutional Term Loan

• Second Lien Term Loan

continued

101

Leveraged Buyouts

FINC 5670/6670/6676 ‐ Yost

Financing Sources• High Yield Bonds

• Bridge Loans

• Mezzanine Debt

• Equity

continued

Financing Structure

102

Leveraged Buyouts

FINC 5670/6670/6676 ‐ Yost

Determining Optimal Structure• Tradeoffs

• Cash flows and credit measures

• Sector-specific

• What will the market allow?

103

LBO Analysis

FINC 5670/6670/6676 ‐ Yost

LBO ANALYSISCHAPTER 5

104

LBO Analysis

FINC 5670/6670/6676 ‐ Yost

THE BIG PICTURE

• HOW DO WE MAKE MONEY?• _________________• _________________

• WHAT DO WE NEED?• _________________

THE PROCESS

• STEP 1: LOCATE AND ANALYZE THE NECESSARYINFORMATION

• STEP 2: BUILD THE PRE-LBO MODEL

• STEP 3: INPUT TRANSACTION STRUCTURE

• STEP 4: COMPLETE THE POST-LBO MODEL

• STEP 5: PERFORM THE LBO ANALYSIS

105

LBO Analysis

FINC 5670/6670/6676 ‐ Yost

STEP 2: BUILD THE PRE-LBO MODEL

A. BUILD HISTORICAL AND PROJECTEDINCOME STATEMENT THROUGH EBIT

B. INPUT OPENING AND PROJECTEDBALANCE SHEET ITEMS

C. BUILD CASH FLOW STATEMENT THROUGHINVESTING ACTIVITIES

BUILD HISTORICAL AND PROJECTED INCOME STATEMENT THROUGH EBIT

• HORIZON: PAST ___ YEARS AND PROJECTED ___ YEARS

• WHY ONLY THROUGH EBIT?

PROJECTIONS AND ASSUMPTIONS

A.

106

LBO Analysis

FINC 5670/6670/6676 ‐ Yost

INPUT OPENING AND PROJECTED BALANCE SHEET ITEMS

• PROJECTED LIKE A _________________

• INCLUDE ADJUSTMENTS COLUMNS FOR CHANGESDUE TO THE TRANSACTION

• OTHER DIFFERENCES:• DEFERRED FINANCING FEES (LONG-TERM ASSET)

• LINE ITEMS FOR EACH TYPE OF DEBT

B.

BUILD CASH FLOW STATEMENT THROUGH INVESTING ACTIVITIES• CASH FLOW FROM OPERATING ACTIVITIES

• FROM INCOME STATEMENT: ________________________• FROM BALANCE SHEET: ________________________

• CASH FLOW FROM INVESTING ACTIVITIES

• FROM CIM: ________________________

• SUM = ______________________________• CASH FLOW FROM FINANCING ACTIVITIES

C.

107

LBO Analysis

FINC 5670/6670/6676 ‐ Yost

STEP 3: INPUT TRANSACTION STRUCTURE

A. ENTER PURCHASE PRICE ASSUMPTIONS

B. ENTER FINANCING STRUCTURE INTOSOURCES AND USES

C. LINK SOURCES AND USES TO BALANCE SHEETADJUSTMENT COLUMNS

ENTER PURCHASE PRICE ASSUMPTIONS• NEED ____________________ TO DETERMINE FINANCIAL

STRUCTURE

• IF A PUBLIC TARGET:• EQUITY PURCHASE PRICE = • EV =

• IF A PRIVATE TARGET:• EV = • EQUITY PURCHASE PRICE =

A.

108

LBO Analysis

FINC 5670/6670/6676 ‐ Yost

ENTER FINANCING STRUCTURE INTO SOURCES AND USES• SOURCES OF FUNDS

• USES OF FUNDS• PURCHASE EQUITY• PAY OFF EXISTING DEBT• PAY TENDER/CALL PREMIUMS• FINANCING FEES• OTHER TRANSACTIONS FEES/EXPENSES

B.

LINK SOURCES AND USES TO BALANCE SHEET ADJUSTMENT COLUMNS

C.

109

LBO Analysis

FINC 5670/6670/6676 ‐ Yost

STEP 4: COMPLETE THE POST-LBO MODEL

A. BUILD DEBT SCHEDULE

B. COMPLETE PRO FORMA INCOME STATEMENTFROM EBIT TO NET INCOME

C. COMPLETE PRO FORMA BALANCE SHEET

D. COMPLETE PRO FORMA CASH FLOW STATEMENT

110

LBO Analysis

FINC 5670/6670/6676 ‐ Yost

BUILD DEBT SCHEDULE

• NEEDED IN ORDER TO…• ESTIMATE _____________ FOR THE INCOME STATEMENT

• CALCULATE ___________________ FOR THE BALANCESHEET

• CALCULATE ___________________ FOR STATEMENT OFCASH FLOWS

• FOR FLOATING RATE DEBT, NEED _______________

A.

• FROM STATEMENT OF CASH FLOWS: • *FCF = ________________________________________

• IF THERE IS CASH ON THE BALANCE SHEET, ___________• TERM LOANS HAVE SOME AMORTIZATION

• ____________________________

111

LBO Analysis

FINC 5670/6670/6676 ‐ Yost

• REVOLVERS:• COMMITMENT FEE + ADMINISTRATIVE FEE = ______________• IF DRAWN, RATE = LIBOR + 425 WITH 1.25% LIBOR FLOOR

• LINKED TO CASH AVAILABLE FOR OPTIONAL DEBT REPAYMENT

• IF NEGATIVE REVOLVER DRAWN

• FROM SOURCES AND USES• SET AMORTIZATION SCHEDULE AND BALANCE (BULLET PMT)• NO PREPAYMENT PENALTY• SWEEP ALL CASH TO REPAY DEBT• INTEREST = RATE X AVERAGE BALANCE• IDEALLY: SUFFICIENT CF TO REPAY BY MATURITY

112

LBO Analysis

FINC 5670/6670/6676 ‐ Yost

• BONDS NOT PREPAYABLE AND NOT AMORTIZED

• NO PAYMENT OF PRINCIPAL

• ASSUMED TO BE REFINANCED AT MATURITY (YEAR 8)• ONLY CASH FLOW = ___________________

COMPLETE PRO FORMA INCOME STATEMENT FROM EBIT TO NET INCOME• CASH INTEREST EXPENSE =

++

• TOTAL INTEREST EXPENSE = +

• NET INTEREST EXPENSE =-

LINK TO INCOME STATEMENT

B.

113

LBO Analysis

FINC 5670/6670/6676 ‐ Yost

COMPLETE PRO FORMA BALANCE SHEET

• LINK LIABILITIES TO ________________________ IN DEBT SCHEDULE

• CALCULATE EQUITY BY ADDING _____________ TO RETAINED EARNINGS

C.

COMPLETE PRO FORMA CASH FLOW STATEMENT

• LINK ____________________________ TOFINANCING ACTIVITIES

D.

114

LBO Analysis

FINC 5670/6670/6676 ‐ Yost

STEP 5: PERFORM THE LBO ANALYSIS

A. ANALYZE FINANCING STRUCTURE

B. PERFORM RETURNS ANALYSIS

C. DETERMINE VALUATION

D. CREATE TRANSACTION SUMMARY PAGE

ANALYZE FINANCING STRUCTURE• DOES THIS FINANCING STRUCTURE WORK?

WHAT ABOUT OTHERS?

• CAN THE FIRM SERVICE ITS INTEREST ANDMANDATORY DEBT REPAYMENTS?• LEVERAGE RATIOS:

• COVERAGE RATIO:

• ARE CREDIT STATISTICS IMPROVING OVER TIME?

A.

115

LBO Analysis

FINC 5670/6670/6676 ‐ Yost

PERFORM RETURNS ANALYSIS

• DOES THE FINANCIAL STRUCTURE PROVIDEADEQUATE RETURNS?

• STANDARD ASSUMPTIONS:• FULL SALE IN ___ YEARS

• EXIT MULTIPLE = ________________________

B.

RETURNS ANALYSIS EXAMPLE• EBITDA MULTIPLE: 8.0 X• INITIAL EQUITY INVESTMENT: $2,100• LTM EBITDA AT YEAR 5: $929.2• NET DEBT AT YEAR 5: $763.9 + $1,500• CASH AT YEAR 5: $0

116

LBO Analysis

FINC 5670/6670/6676 ‐ Yost

DETERMINE VALUATION

• REASONABLE ENTRY/EXIT MULTIPLES?

• APPROPRIATE IRR?

• TENDS TO BE A __________ VALUATION THAN DCF• NO ____________ OF STRATEGIC BUYER

C.

CREATE TRANSACTION SUMMARY PAGE

D.

117

Review for Final Exam

FINC 5670/6670/6676 ‐ Yost


Grades• Undergraduate:

• 25% Exam #1 + 25% Exam #2 + 25% Final Exam + 25% Cases/Assignments

• Graduate:• 25% Exam #1 + 25% Exam #2 + 25% Final Exam

+ 15% Cases/Assignments + 10% Project/Presentation

118


FINC 5670/6670/6676 ‐ Yost

Thursday, April 16th

6:00 – 8:30 PMLowder 125A

• For online students: Friday (4/17) to Monday(deadline: Monday, 4/20)

• Don’t Forget:• Financial Calculator• A Black Pen (preferably)• Reminder about the back side

The Big Picture


Valuation• Comparable Companies• Precedent Transactions• Discounted Cash Flow• LBOs

Exam

#2

Final Exam

119


FINC 5670/6670/6676 ‐ Yost

Things To Do…

• Study both the notes and the book.

• End of chapter problems.

• Have a calculator for calculations.

• Get help if you are having problems.

HELP!•Office Hours

• Tuesdays and Thursdays• 8:00 AM – 9:00 AM• or by appointment

• You can ask questions up to your exam time

120


FINC 5670/6670/6676 ‐ Yost


Warning

The following may not contain everything we covered, and

therefore, may not contain all testable material.

121


FINC 5670/6670/6676 ‐ Yost

LBOs• Participants




• Financing

LBO Analysis• Locate and Analyze the Necessary Information

• Build the Pre-LBO Model

• Input Transaction Structure

• Complete the Post-LBO Model

• Perform the LBO Analysis

122


FINC 5670/6670/6676 ‐ Yost

LBO Analysis• Balance sheet, income statement, statement of cash flows

• Basic construction and how they interact

• Sources and uses of funds

• Debt schedule

The Big Picture


Valuation• Comparable Companies• Precedent Transactions• Discounted Cash Flow• LBOs

123


FINC 5670/6670/6676 ‐ Yost

Old Stuff• Calculate net proceeds from asset and stock sales

• Calculate DTL

• Calculate fully diluted shares outstanding

• Calculate DCF and WACC

• Calculate enterprise value and equity value

Old Stuff• Pros and cons of valuation methods

• Which valuation methods are higher/lower? Why?

• Pros and cons of sell-side methods

• Exchange ratios

124


FINC 5670/6670/6676 ‐ Yost

Practice Problem #1• The following is forecasted EBITDA and debt for Yost Enterprises.

Year EBITDA Debt0 $1,935.4 $5,900.01 $2,066.4 $4,795.82 $2,184.4 $3,700.03 $2,288.7 $3,700.04 $2,376.2 $3,700.05 $2,444.5 $3,700.0

Practice Problem #1 – cont.

• If the entry and exit multiples are 8.0x, calculate the IRR.

125


FINC 5670/6670/6676 ‐ Yost

Practice Problem #2•Given the following forecasted LIBOR rates and TLB information, calculate interest expense for years 2, 4, and 6.

126


FINC 5670/6670/6676 ‐ Yost 127

Documents

Introduction to M&A - Auburn Universitywebhome.auburn.edu/~yostkev/teaching/finc56706670/notes/... · 2019-12-20 · Introduction to M&A FINC 5670/6670/6676 ‐Yost MERGER WAVES Wave