RE: Quick & Dirty Basic LBO Model: Modeling Private Cos
The ramifications for a private company vs a public company are very similar - the major difference is that there is no EPS and Shares Outstanding. Thus, to "fudge it", you could assume that there is one Share Outstanding or, better yet, to be more precise, you would use Net Income => so instead ... The ramifications for a private company vs a public company are very similar - the major difference is that there is no EPS and Shares Outstanding. Thus, to "fudge it", you could assume that there is one Share Outstanding or, better yet, to be more precise, you would use Net Income => so instead of P/E, you would use Equity Value / Net Income per the courses.

In addition, for an LBO of a private company or a subsidiary (treated the same), the biggest change would be to drive the value of the offer price to be based on TEV/EBITDA as opposed to percent premium over current stock price (which doesn't exist). Everything else stays the same => you would still have TEV and Equity Value, just not Stock Price. Thus, there is no concept of "number of shares" or "nominal value"; you simply use TEV as the starting point and work the opposite direction on the capital structure.

For a large corporation wishing to divest a business unit with no legal entity, the parent company would have to first create a legal entity or structure it as an asset sale. There is never "no equity" - there is always a cost basis somewhere (both GAAP equivalent of Shareholders' Equity and tax basis for tax treatment). Read More

Very quick question
I know this isn't your specialty, but what major database do the majority of the banks use for Transactions Comps? ie. CapitalIq, Thomson SDC, etc? If a company were to subscribe to one what would you choose?

RE: Merger Modeling Basics: 338(h)10 election
Transactions Fees go to GW directly, "one for one". When calculating GAAP financials, the "GW" calcuation for tax deducts would include Trx Fees. The actual deductibility depends on the country-specific tax laws and even state-specific tax laws, too difficult and more importantly, unnecessary for fi... Transactions Fees go to GW directly, "one for one". When calculating GAAP financials, the "GW" calcuation for tax deducts would include Trx Fees. The actual deductibility depends on the country-specific tax laws and even state-specific tax laws, too difficult and more importantly, unnecessary for finance professionals to get involved with. In short, the discrepancy, if any, is too immaterial or insignificant to bother with. In 2009, with part two of SFAS141R and IFRS3 taking effect, Trx Fees are to be deducted rather than capitalized as part of GW so this is even less relevant. Read More

RE: Valuation
Which rate should we use (Cost of Debt or WACC) to discount the unsuded NOLs of the last projected year? With regards to my reference on the interest expense i think i have not explained properly my thought. A company enjoys 2 different tax shields, one arising from the NOLs (hence to be used ... Which rate should we use (Cost of Debt or WACC) to discount the unsuded NOLs of the last projected year?

With regards to my reference on the interest expense i think i have not explained properly my thought.

A company enjoys 2 different tax shields, one arising from the NOLs (hence to be used directly on the DCF the way you said and as i showed on the example). The other arises from the capital structure of the company. If we make the assumption the the company will enjoy a fixed capital structure from the year 2012 onwards that means that it will haev some interest expenses on its P&L. This creates a tax shield. My view is the we can calculate the present value of this form of tax shield (which has nothing to do with the calculation of the FCFF) the follwing way:

Net Debt of last projected year x Cost of Debt x Marginal Tax rate=Tax shield from leverage (treat it as a perpetuity)

Then we can incorporate this amount to the calculation of EV where eventually it will increase it.

This was my original thought

Thanks again fro your support!! Read More

Quick & Dirty Basic LBO Model: About the LBO model
Hi there, In relation to this class, I have a couple of doubts that you may be able to help me with: (1). If we had dividends during the investment period, would we include them when calculating the Multiple of Capital (in that case being [Dividends + Exit Equity Value] / [Equity Injected] )? ... Hi there,

In relation to this class, I have a couple of doubts that you may be able to help me with:

(1). If we had dividends during the investment period, would we include them when calculating the Multiple of Capital (in that case being [Dividends + Exit Equity Value] / [Equity Injected] )?

(2). As we are treating this deal under the Purchase Accounting method (as per the videos and Hotspots), shouldn't the transaction fees be capitalized as Goodwill and therefore the Pro Forma opening Shareholders' Equity be the Equity Injected (direct from Sources) only? So, why are you deducting the transaction fees from the Equity Injected when calculating the PF Shareholders' Equity?

(3). In the LBO Overview lecture you say that it is better to have the Equity contribution as the balancing item in the Sources & Uses of funds (also, as a way of maximizing the amount of debt used). So, why are you fixing the equity contribution here in the model? Because by doing this we are assuming a fairly significant amount of debt (implied Debt / EBITDA of 5.9x) and we have no control over our capital structure, right?

(4). If I were to use this model for Valuation purposes (to determine the floor valuation for a given company), how would I do to find the maximum Equity Value I could afford to pay given a required IRR of let's say 25%?

(5). Just one comment here: Your template model does not include the Data table used by the instructor to explain the sensitivity analysis. I know it's pretty easy to do one, but just to let you know (if not already advised).

I appreciate your help.

thanks. Read More