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Package 5: Merger Modeling Topics

Package 5: Merger Modeling Topics

Our merger modeling topics introduce critical skills required for understanding how to structure and analyze mergers & acquisitions. After modeling a company's profits / cash flow and valuing the entity, one must decide what to do with the company in the grand scheme of its strategic alternatives, including a merger or acquisition. We introduce the basics of deal structuring and implications on accretion/dilution to building more involved merger models with the complexity of complicated FASB and IFRS accounting rules.

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Last 10 posts

"Share Repurchases" video online at www.wstselfstudy.com under FREE EXHIBITS
Hi In the last Q&A you refer to the free "Share Repurchases" video online at www.wstselfstudy.com under FREE EXHIBITS to have a better understanding of the opportunity cost of funding Capital structure components. I can`t find the video. Could you please help? Thank you

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by ombretta m.

added 7 years ago

Marginal Interest Rate (A/D Analysis example)
Where specifically do you get the Marginal Interest Rate (is it savings rate, or treasury?) from, especially in the current low interest rate environment?

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by Tomasz P.

added 8 years ago

NOL cap (due to M&A) affects "ALL FUTURE" NOLs?
In the tax schedule excel worksheet, NOL Used to Shelter Income (cell g13) formula takes the NOL cap per year if there is a change of control forward forever. So it appears that this “cap” affects all future (ending NOL) balances (and not just the acquired/historical target NOL portion)? Also i... Read More

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by Guest 1.

added 10 years ago

Merger Modeling Basics: about the goodwill amortization
Hi, if there is no goodwill amortization, but under certain circumstances, the deal can be considered as asset deal , or can be applied the normal asset depreciation, even there is no amortization on goodwill in this case, I think you still have to incorporate the depreciation into the model, becaus... Read More

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by Guest 1.

added 10 years ago

GAAP requirement to recognize all known liabilities
In the M&A module, when illustrating the different effective tax rates in the Pre-/Post-142/338 election scenarios, it is stated that GAAP requires all companies to recognize all known liabilities as soon as possible, hence why under a 338 election, the reported GAAP effective tax rate is lower ... Read More

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by Guest 1.

added 10 years ago

Tax implications on Cash vs Stock deal
Do Stock deals enjoy a distinct financial advantage over cash deals due to U.S. tax policy (since stock-for-stock deals are not considered taxable events)? If so, what are the tax implications of stock vs. cash (besides the fact that cash clearly has forgone interest income or the interest expense f... Read More

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by Guest 1.

added 10 years ago

Quick SGA question from basic accretion/dilution model
Hi, Some time ago I posted this question in the basic accretion dilution model. [quote:1sxzkh33]Hi, This might be a dumb question: Why are we using the 2005E for EPS, PE, and net income but SGA from 2004A? Posted: 10/8/2008 9:13:27 PM ========== Not a dumb question! You are calculating acc... Read More

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by Guest 1.

added 10 years ago

Questions on basic Accretion/Dilution model
1. Goodwill: since GW is not amortised whatever the case I was a little confused that you use the terminology of GW amortisation. The US 338 election may allow a tax credit amortisation but I remain confused here slightly. If there is no GW amortisation allowed anywhere in the world then you should ... 1. Goodwill: since GW is not amortised whatever the case I was a little confused that you use the terminology of GW amortisation. The US 338 election may allow a tax credit amortisation but I remain confused here slightly. If there is no GW amortisation allowed anywhere in the world then you should not have it in anywhere the models...its confusing. - GW is not amortised except for asset deal or any step up to FMV (is this a simple asset revaluation?). In an asset deal all we have is straight up depreciation of new asset acquired as part of Capex. This is not GW amortisation so should not be referred to as such? - s338: no change re GW amortisation which is not allowed in the P&L but you get a tax credit for GW amortisation even though GW is NOT amortised? I think from a terminology perspective it is clearer to call it a s338 tax credit rather than a GW Amortisation Credit since GW itself remains NOT amortiseable. 2. Target PE and analysis of when a deal will be accretive and dilutive - your explanation of merging Company A with Company B 100% stock deal: lower target PE is accretive because $1 of earnings buys more share value, thus you need less of your dollars to buy a target share value hence it will be earnings accretive. Is this the right intepretation of your explanation? I justify it slightly differently which I think is the same thing: lower target PE will be accretive since it generates more earnings per its share price (has a lower PE). Hence if I combine it with my PE which generates less earnings per my share price (has a higher PE) then the combined PE will be lower to the original acquirors PE meaning the combined entity will require less earnings to generate the combined share price i.e. will be earnings accretive. Do you agree? The "break even" PE in this case is equal to the acquirors PE. 100% cash deal: "break even" PE has to equal 1/post tax cost of debt used to finance the deal (assuming no own cash utilised for the deal). Of course if the target PE is lower than that "break even" PE then it will accrete combined earnings versus the acquiror and vice versa as above. I like this test - what is the theoretical/mathematical justifcation behind it? Read More

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by Guest 1.

added 10 years ago

Implied P/E of debt
Can you further explain implied P/E of debt for the Acquiror? I have read this response and have watched the video but need further explanation than “Don't forget, multiples (5x) are inverses of percentages (20%) and that's mathmatical in nature. $100 x 5x is the same as $100 / 20%.” I don’t ... Read More

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by Guest 1.

added 10 years ago

AD analysis left-field questions
I had a few side/random questions from the accretion dilution analysis. Finance ONLY purchase price equity (& NOT EV), as quick/dirty model/anal? In other words, I would think that financing would FUND EV (if there is debt, that debt would most likely be refinanced/ repaid/retired, or less co... I had a few side/random questions from the accretion dilution analysis. Finance ONLY purchase price equity (& NOT EV), as quick/dirty model/anal? In other words, I would think that financing would FUND EV (if there is debt, that debt would most likely be refinanced/ repaid/retired, or less commonly, assumed/rollover), but most accretion dilution analysis I see FUND ONLY the EQUITY OR OFFER VALUE = (target undisturbed price + prem) * target FD shares (is this because the analysis is quick and dirty and not detailed/complexed)? PF NI (of both stand-alone cos) is probably marginal/PF (not necessarily normalized/cleansed)? In other words, I would think that NI of buyer + NI of target SHOULD BE normalized but may sometimes contain marginal one-time items for PF EPS purposes? Side questions: For tax rate, I'm thinking that it is usually the statutory rate (adjusted for PF/marginal/forecast factors)? For PF debt interest rate% (depending on which debt tranche is used for financing), I'm thinking that is the blended/average book (footnote) rate (adjusted for PF/marginal/forecast factors/variables)? It appears that the accretion dilution analysis is an EPS / income statement / non-cash / accrual analysis - as such it seems like it is not entirely relevant as a cash effect/consequence analysis. If so, how relevant is a cash effect/consequence analysis (I'm thinking that it is relevant but less so, and that these metrics are reflected in the PF leverage/capitalization and ownership statistics)? How relevant is the additional/incremental (tax deductible or not) D&A ex from asset step/write-up? It seems like alot of the PPA % allocation assumptions originate from in-depth accountant analysis/review, and that its hard to plainly make "standard" assumptions for practical modeling purposes. Fees are arguably one time items. However, I have seen them included in some (probably) detailed analysis. Should they be included (I didn't see that in WST version). In likely a detailed (more full blown / integrated merger) analysis/model, I would think that the non-financing fees would affect the uses (and thus sources) of funds resulting in higher EV and thus financing costs (to fund that higher EV); financing fees would be capitalized in BS and result in additional amortization costs in P&L and thus lower PF EPS. Read More

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by Guest 1.

added 10 years ago