Practice

How do the Combined Equity Value and Combined Enterprise Value change based on the deal's financing method?

An Acquirer has a Current Enterprise Value of $2,400M and contributes 80% of the Combined Company's Revenue in a proposed 100% Stock deal. Calculate the Combined Pro-Forma Enterprise Value based on Revenue, and the Target's Implied Enterprise Value.

A private Target has a Purchase Enterprise Value of $800M, Cash of $60M, Debt of $180M, and a Minimum Cash requirement of $40M. Calculate (a) the Purchase Equity Value the selling shareholders receive, and (b) the total deal funding required on the Uses side in a cash-free, debt-free structure, including $15M of Transaction/Financing Fees.

An Acquirer has $250M of Debt and $80M of EBITDA (3.1x Debt/EBITDA). Peer companies average 5.0x Debt/EBITDA. How much additional Debt could the Acquirer raise to reach that peer level?

How does an Acquirer typically determine the mix of Cash, Debt, and Stock to use in a deal?

Isn't the Foregone Interest on Cash just an abstract "opportunity cost"? Why do you actually deduct it in the model?

An Acquirer wants to fund a deal with 100% Debt. The Seller's Yield at the purchase price is 7.5%, and the Acquirer's tax rate is 25%. At what pre-tax interest rate on the Debt does the deal turn dilutive?

Company A has 10 million shares at $20.00 (a $200M Equity Value) and Net Income of $20M (a $2.00 standalone EPS, a 10x P/E). It acquires Company B for a $60M Purchase Equity Value in a 100% Stock deal; Company B's Net Income is $8M (a 7.5x Purchase P/E), same tax rate. Calculate the accretion. Then, suppose Company A were instead twice as big, with an Equity Value of $400M and Net Income of $40M (same $20.00 share price, so 20 million shares), acquiring the SAME Company B on the same terms. Calculate the new accretion, and compare the two results.

How do you determine the Purchase Price in an M&A deal for a public Seller versus a private Seller?

An Acquirer has a Current Equity Value of $600M, Cash of $150M (Minimum Cash of $40M), Debt of $120M, and EBITDA of $40M (3.0x Debt/EBITDA). Peer companies average 5.0x Debt/EBITDA. Estimate the maximum deal size this Acquirer could realistically fund, assuming it limits its Stock issuance to half its Current Equity Value.

Why do Deferred Tax Liabilities get created in most M&A deals?

Company A has an Equity Value of $100M, Net Income of $5M, and a 50% tax rate. It acquires Company B for a $50M Purchase Equity Value (no premium) using 100% Debt at a 10% interest rate. Company B's Net Income is $2.5M, at the same tax rate. What's the Combined P/E multiple?

Why can a Combined Company's Debt/EBITDA ratio right after a deal closes be a misleading, "deceptive" number?

If the Purchase Enterprise Value is the "true price," why are most M&A models built around the Purchase Equity Value instead?

An Acquirer has an Equity Value of $600M and Enterprise Value of $720M, with 120 million shares outstanding at $5.00 per share. It acquires a Target with an Equity Value of $120M and Enterprise Value of $180M, paying a 25% premium in a 100% Stock deal. A few months later, the market decides this 25% premium wasn't justified. Calculate the Combined Equity Value and Enterprise Value immediately after announcement and again after the market's reaction, and find the Acquirer's new share price.

Without doing any math, what range would you expect a Combined P/E multiple to fall in after an M&A deal, and what determines where in that range it lands?

How should you treat Stock-Based Compensation (SBC) in a merger model?

Company A has 15 shares outstanding at a $30.00 share price and Net Income of $22.5M (a $1.50 standalone EPS). It acquires Company B for a $180M Purchase Equity Value using 100% Debt at a 6% interest rate. Company B's Net Income is $12M. Both companies have a 25% tax rate. Calculate the Combined EPS and the accretion/dilution percentage.

Expected Synergies are $50M per year, valued as a simple growing perpetuity at a 10% Discount Rate with 2% long-term growth. What's the approximate Present Value of these Synergies?

An Acquirer has a Current Enterprise Value of $1,800M and a Current Equity Value of $1,500M (implying $300M of Net Debt). It contributes 72% of the Combined Company's EBITDA in a proposed 100% Stock deal. The Target has 40 million shares outstanding and, for simplicity, no Net Debt of its own. Calculate the Combined Pro-Forma Enterprise Value, the Target's Implied Enterprise Value, its Implied Equity Value, and its Implied Offer Price per Share.

Immediately after announcing a deal, an Acquirer's Combined Enterprise Value is $780M. A few months later, the market decides the Acquirer overpaid by $30M. What's the new Combined Enterprise Value?

Why can't you just take a simple average, or a weighted average, of the Buyer's and Seller's standalone multiples to determine the Combined Multiple?

Why do many merger models tend to overstate the impact of Synergies?

An Acquirer has a Cash balance of $180M and requires $60M of Minimum Cash. How much Cash is available to fund an acquisition?

Why do companies focus so much on EPS in M&A deals, even though it's not the same thing as cash flow?

Why might an Acquirer choose to use Stock or Debt even if it could technically pay for the Target with 100% Cash?

What happens if a Buyer pays an Equity Purchase Price that's actually below the Target's Common Shareholders' Equity?

Company A has a P/E of 12x, a Debt interest rate of 7%, a Cash interest rate of 3%, and a 25% tax rate. It wants to acquire Company B at a purchase P/E multiple of 14x using 1/3 Stock, 1/3 Debt, and 1/3 Cash. Determine whether the deal is accretive or dilutive.

Using Company A (Enterprise Value $200M, EBITDA $20M) and Company B (Purchase Enterprise Value $100M, EBITDA $20M) from before, what's the Combined TEV/EBITDA multiple after the deal?

Company A has an Enterprise Value of $200M and EBITDA of $20M. What's its TEV/EBITDA multiple?

Does the control premium an Acquirer pays for a Target actually "last" after the deal is announced?

Company A has an Enterprise Value of $1,000M and EBITDA of $100M. It acquires Company B, which has a Purchase Enterprise Value of $500M and EBITDA of $25M. What's the Combined TEV/EBITDA multiple?

Company A has an Equity Value of $800M and Net Income of $80M (a 10x P/E). It acquires Company B for a $1,600M Purchase Equity Value in a 100% Stock deal; Company B's Net Income is $40M, at a 25% tax rate. How much in pre-tax Synergies are needed for the deal to be exactly neutral?

An Acquirer's Equity Value falls by $40M after the market decides its acquisition premium wasn't justified. It has 50 million shares outstanding. By how much does its share price fall?

What are the advantages and disadvantages of each purchase method (Cash, Debt, and Stock) in M&A deals?

Continuing the same scenario (Acquirer Equity Value $600M, Enterprise Value $720M; Target Purchase Equity Value $150M, Purchase Enterprise Value $210M; $30M premium later deemed unjustified), how would the Combined Equity Value and Enterprise Value differ if the deal had instead been funded with 100% Debt or Cash rather than Stock?

An Acquirer's after-tax Cost of Debt is 6%, and it uses 60% Debt and 40% Cash (2% after-tax cost) to fund a deal. What's the Weighted Cost of Acquisition?

Walk through how a Contribution Analysis works for a 100% Stock M&A deal.

Are cash-free, debt-free deals really economically different from standard M&A deals?

Which purchase method does a Seller typically prefer in an M&A deal, and why?

Is there a shortcut for guesstimating accretion/dilution in a 100% Stock deal?

What are the main problems or limitations of merger models?

Using the same deal (Acquirer Equity Value $700M, Target Purchase Equity Value $220M), what's the Combined Equity Value if the deal is instead 100% Cash?

In a 100% Cash or Debt deal, the Seller's Equity Value doesn't show up anywhere in the Combined Equity Value. Did it just disappear?

A Combined Company has EBITDA of $180M and total annual Interest Expense of $40M after a deal closes. What's its EBITDA/Interest coverage ratio?

Company A has 20 shares outstanding at a $40.00 share price and Net Income of $30M. It acquires Company B for a $200M Purchase Equity Value in a 100% Stock deal; Company B's Net Income is $15M. Assume the same tax rate for both. What's the Combined EPS?

What are the main drawbacks of using an IRR vs. Discount Rate analysis to evaluate an M&A deal?

What is the "true price" in an M&A deal, the Purchase Equity Value or the Purchase Enterprise Value? Why?

How can you tell whether an M&A deal will be accretive or dilutive?

Company A has an Enterprise Value of $150M, an Equity Value of $120M, EBITDA of $15M, and Net Income of $6M. Company B has a Purchase Enterprise Value of $60M, a Purchase Equity Value of $54M (implying $6M of Net Debt), EBITDA of $10M, and Net Income of $3M. Both have the same tax rate. Calculate the Combined TEV/EBITDA and P/E multiples in a 100% Stock deal.

Why might one company want to buy another company?

An Acquirer has an Enterprise Value of $700M. It acquires a Target with a Purchase Enterprise Value of $200M in a 100% Stock deal. What's the Combined Enterprise Value?

Company A's standalone EPS is $1.50. After an acquisition, its Combined EPS is $1.80. What's the percentage accretion?

What's the issue with the "Pro-Forma EPS" figure many companies publish when announcing a deal?

An Acquirer purchases a Target for a $900M Equity Purchase Price. The Target has $500M in Common Shareholders' Equity, $20M of existing Goodwill, and a $15M existing Deferred Tax Asset that gets written off in the deal. The Acquirer writes up the Target's PP&E by $80M, at a 25% tax rate. Calculate the Goodwill created.

A Seller has Net Income of $40M and a Purchase Equity Value of $500M. What's the Seller's Yield?

An Acquirer has an Equity Value of $700M. It acquires a Target for a $220M Purchase Equity Value in a 100% Stock deal. What's the Combined Equity Value?

Company A has $300M of projected Operating Income and $15M of projected Interest Income. Company B has $120M of projected Pre-Tax Income. Company A acquires Company B using $150M of Cash (4% Foregone Interest Rate) and $200M of new Debt (6% Interest Rate). Company A's tax rate is 25%. Calculate the Combined Pre-Tax Income, Combined Net Income, and Combined EPS, given Company A has 40M shares outstanding.

An Acquirer has a P/E multiple of 18x. The Seller has a Purchase P/E multiple of 22x. In a 100% Stock deal, is this accretive or dilutive?

How does a Value Creation Analysis work, and when is it actually a credible tool?

Company B has a Purchase Enterprise Value of $100M and EBITDA of $20M. What's its Purchase TEV/EBITDA multiple?

Continuing the same companies (Company A: Enterprise Value $180M, Equity Value $150M, EBITDA $18M, Net Income $7.5M; Company B: Enterprise Value $70M, Equity Value $70M, EBITDA $14M, Net Income $3.5M; 50% tax rate for both), if Company A instead uses 100% Debt at an 8% interest rate to fund the deal with no premium, what are the new Combined TEV/EBITDA and P/E multiples?

An Acquirer purchases a Target for a $700M Equity Purchase Price. The Target's Common Shareholders' Equity is $900M, with no write-ups or other adjustments. Since negative Goodwill isn't allowed, what Extraordinary Gain gets recorded?

Are there cases where EPS accretion/dilution isn't that important? What else could you look at instead?

If an Acquirer is much bigger than a Target it's acquiring, is a 100% Stock deal more or less accretive than if the two companies were closer in size, holding both companies' P/E multiples fixed?

An Acquirer funds a deal with 40% Cash at a 3% after-tax cost, 35% Debt at a 5% after-tax cost, and 25% Stock at an 8% after-tax cost. What's the Weighted Cost of Acquisition?

A Combined Company has $500M of Debt and $100M of EBITDA immediately after a deal closes (5.0x Debt/EBITDA). It generates $80M of annual Free Cash Flow available for Debt repayment, and its EBITDA grows 5% per year. Calculate its Debt/EBITDA ratio at the end of Year 1 and Year 2, assuming all Free Cash Flow each year goes toward Debt repayment.

How do you calculate a Combined Company's Debt repayment capacity in a merger model?

An Acquirer purchases a Target for a $1.2 billion Equity Purchase Price. The Target has $700M in Common Shareholders' Equity and no existing Goodwill. The Acquirer writes up PP&E and Other Intangible Assets by $150M, at a 25% tax rate. How much Goodwill is created?

Company A: Enterprise Value $180M, Equity Value $150M, EBITDA $18M, Net Income $7.5M, 50% tax rate. Company B: Enterprise Value $70M, Equity Value $70M, EBITDA $14M, Net Income $3.5M, same tax rate. Company A acquires Company B using 100% Cash, paying no premium, with a 4% Foregone Interest Rate on Cash. Calculate the Combined TEV/EBITDA and P/E multiples.

How does a merger differ from an acquisition?