Accretion Dilution Model

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"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

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

Re: AD analysis left-field questions

1) Yes, generally, the debt is assumed or refinanced and as such, only the Equity portion is financed (ie 50/50). 2) Always use normalized figures; please clarify your question. 3) Tax rate is usually the marginal statutory tax rate, correct. 4) Similarly, interest rate would be the marginal cost... Read More

by WST Expert 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

RE: Quick SGA question from basic accretion/dilution model

There can be estimates for SG&A if you dig through the research analysts reports and some estimates collection services (ie, I/B/E/S, First Call, Bloomberg, etc) do track that. However, you question is in the wrong direction altogether. Even if we had the number (very possible and easy to get... Read More

by WST Expert 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

Re: Questions on basic Accretion/Dilution model

We still call it GW amortization in our model because the calculation is GW, not the entire purchase price. In our M&A Deal Structuring course, we give the example of a $200 asset. A common mistake is to depreciation the $200 but since you are adding Target Net Income in the simple accretion dil... Read More

by WST Expert 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

Re: Implied P/E of debt

Ratios and multiples are simply inverses of each other. When discounting $100 by 10% over one year, one normally does $100/1.1 = $90.909091 However, old school finance teaches you to use PV factors, or $100 x 0.909091 = same result. The PV factor is derived by taking 1/1.1 which is the same mathemat... Read More

by WST Expert 1.

added 10 years ago