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RE: Sources & Uses for less than 100% LBO
Yes and no. If less than 100% (assuming greater than 50&) then sources and uses should match true in and outflow of $$ by "grossing it up" the way you described, you are effectively creating a "fake" transaction. You are not technically incorrect (hence the "yes") but we wouldn't consider that ... Read More

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by WST Expert 1.

added 11 years ago

RE: 338(h)(10) elections and NOLs
1) Correct. Because I am selling you my stock, it is taxed at my respective individual level. My company isn't physically being touched or doing anything. Just a xfer of ownership. You, the acquiror, of course, will incur goodwill since you are buying my company. 2) A seller is motivated to do a ... 1) Correct. Because I am selling you my stock, it is taxed at my respective individual level. My company isn't physically being touched or doing anything. Just a xfer of ownership. You, the acquiror, of course, will incur goodwill since you are buying my company.

2) A seller is motivated to do a 338(h)(10) only if they are a pass-thru entity, ie S-Corp, LLC, LLP, etc. hence, you rarely, if ever, see 338(h)(10)s done on public to public deals. The latter falls under 368(a)(1)(a), 368(a)(1)(b) or 368(a)(1)(c) which are effectively stock reorgs. The exception, as we spoke about, were the case of offset gains with NOLs that would be worthless under Section 382 limitation or in the case of subsidiaries (considered as passthru entity under Section 223).

3) Yes. If you are an S-Corp, and DON'T do a 338(h)(10) election, you have some very poor advisors. Since everything is looked at from an after-tax basis, the Acquiror can pay more since they can deduct taxes on the "depreciation of goodwill". The Acquiror is looking at Accretion/Dilution analysis (maximizing/increasing EPS) and the Seller cares about after-tax proceeds, net to the individuals (or rather, they SHOULD be looking at those). And 338(h)(10) elections are usually the best. There are definitely exceptions that I can't think of right now, but globally speaking, correct.

4) Correct as well. LLCs and LLPs are pass-thru entities. The major financial difference (putting aside legal form for a sec) is that S-Corps are effective pro-rata, whereas with LLCs and LLPs, your ownership %age could be different from your profit share %age, as LLCs and LLPs utilize capital accounts based on an agreed formula and doesn't have to be pro-rata. Now, from the legal point of view, all structures have "corporate veil"'; howveer, with LLPs for instance, the offending partner(s) are personally liable as well, whereas the non-offending partners liability are limited only to their capital account balance (capital they put in, etc). In the case of Arthur Andersen, the handful of convicted partners are personally liable whereas the remaining thousands of partners only lose their monetary stake in the company. In the case of private equity funds and hedge funds, there's ALWAYS a "GP" (General Partner) who has unlimited liability and the "LPs" (Limited Partners) only contribute $ and can lose all of that $ but not more. So yes, in short, correct. Read More

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by WST Expert 1.

added 11 years ago

RE: Treatment of Revolver as Debt for TEV
Assuming you are attempting to calculate equity value, there is no debate. Revolver is debt no matter how you slice it and is to be treated as such. Logic in this case: working capital is dollars tied up in the business. If the company is sold, there is usually a working cap requirement. How the... Read More

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by WST Expert 1.

added 11 years ago

RE: Tangible Book Value calculation for Goodwill
Great question. If calculating JUST standalone Tangible Book, strict definition should be minus ALL intangibles not just goodwill. However, it depends on what you are calculating. If you want specifically for goodwill, recall in our LBO class we just calculated goodwill and then, didn't incl... Read More

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by WST Expert 1.

added 11 years ago

RE: Stock Based Compensation
For our comparable company analysis, while all analysts seem to be submitting their EPS figures on a GAAP basis (incl. SBC), it is ambiguous as to whether they submit their EBITDA figures to consensus with or without SBC. So basically one comp has an EBITDA consensus number that is the average of EB... For our comparable company analysis, while all analysts seem to be submitting their EPS figures on a GAAP basis (incl. SBC), it is ambiguous as to whether they submit their EBITDA figures to consensus with or without SBC. So basically one comp has an EBITDA consensus number that is the average of EBITDA forecasts incl SBC and EBITDA forecasts excl. SBC. If we are using consensus estimates in our comps, this seems to really murk things up? Is there any simple answer to this that I am missing?

What should be done?
After looking at which analysts include SBC vs. exclude SBC, you should pick the most common methodology. If a majority of analysts have included SBC expense in their figures, then you should adjust all the ones that did not include it to keep things on an apples-to-apples basis. However, this is extremely arduous to do and a ton of hassle. However, it is the most accurate way to do it.

What is done?
Research analysts are more focused on trends vs. a true bottom up when deriving a forecast P&L. Thus, in some instances it is difficult to know if their SG&A number includes stock based comp. If they don’t have a separate line item for SBC, then you will have to figure out if they are including it in SBC or not based on the way they present their historicals.

Why it doesn’t matter?
In many instances, you can argue why it does not matter whether you make these adjustments or not, since it’ll be wash in terms of the people who do or don’t include. You are taking the averages of these numbers, so your margin of error is a lot less now. Additionally, you will probably use a rounded multiple range anyways that is based on an average of the comps.

What you can do without the brain damage….
Make an estimate of the analysts who used stock-based compensation. Take an average of the stock based comp adjustment from the analysts and make this adjustment to the ones who did not include it. I think it is safe to say that the adjustment can be assumed to be X*(1-T)

For the DCF analysis, the acquiror (our client) has created internal projections of the target and based them off of consensus estimates to begin with. The consensus estimates for this particular company overwhelmingly does not seem to include SBC. Does this significantly alter how we should look at computing the standard DCF? One suggestion is to subtract out a run-rate SBC in all of the years at the EBIT line in order to get the tax benefit and add it back along with the other items to get to free cash flow.

In practice adding back SBC expense in the FCF calc in a DCF is not done, its fair to assume not to add back stock based comp in any case, because:

Even though the expense is non-cash at the time, there will be a cash outflow when they are exercised
If you are a private company, you wont pay back in stock but might pay in profit sharing Read More

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by WST Expert 1.

added 11 years ago

RE: Effective vs marginal tax rate for FCFF
if the marginal tax rate and the effective tax rate are similar, it really doesn't matter. normally it is marginal tax rate for everything, however, b/c this isn't an "incremental" analysis (like a merger), effective tax rate is preferred for FCFF calculations. cash taxes is the term used to ind... Read More

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by WST Expert 1.

added 11 years ago

RE: DCF - FCFF time horizon and excluding Terminal Value
Thank you for your inquiry. If you don't include a TV, you are assuming the business dissipates after the end of your projection period. To answer your specific question, it depends on your growth rate, TV multiple and discount rate assumptions and how many years you decide to go out. See o... Read More

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by WST Expert 1.

added 11 years ago

RE: Pesky Technical Question
I turned it off, and on, and in either case, the cells that auto fill a percentage still do, and the one's that don't still don't. I've also got the enable automatic percent entry and calculate tab radio button "automatic" clicked. I'm wondering if maybe for some reason Excel doesn't see these ... Read More

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by Guest 1.

added 11 years ago

RE: Pesky Technical Question
Forget excel. Try ctrl+shift+c for our percent macro formatting.

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by WST Expert 1.

added 11 years ago

RE: Pesky Technical Question
Well,that's fine once there is data in the cell. But since it won't autofill, the formatting issue is sort of collateral. I was just fumbling for a theory and wondering if there was some reason the "enable automatic percent entry" was not firing off as it does elsewhere. I guess it is not a prob... Read More

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by Guest 1.

added 11 years ago

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