Basics of M&A
- Determine the offer value = Offer price per share X Target dilluted shares outstanding
- Determine Consideration Mix = Cash + Stock + Debt
- Transaction Structure based on Tax purposes
- Income Statement Impact (accretion or dillution based on Proforma EPS -Acquisition EPS)
- Balance Sheet Impact to credit rating, financial health, goodwill
- Ownership impact
- Tax Consequences
Economic Profit (Value Creation)
EP = NOPAT - (Capital X Cost of Capital)
Integrates growth, profit, ROIC, Cost of Capital
Multiples are attributed to:
- Strong revenue growth
- Significant Market Share or Strong niche position
- Strong barriers to entry
- A strong management team
- Strong, stable cash flow
- No significant concentration of customers, products, suppliers, or geographic markets
- Low risk of technological obsolescence or production substitution
Most commonly used multiples
- Discounted Cash Flow
- Public Market Multiples
- Precedent Industry Transactions
M&A Metrics
- IRR > WACC
- Accretive to Book EPS ( also AKA BVPS) by Yr 2
- Book ROI in 5th year > 10%
Book EPS (BVPS) = ..It is calculated by dividing a company’s total equity (assets minus liabilities) by the number of outstanding shares.
Why Acquire a Company?
- Increase revenue growth
- Accelerate Transformation (add IP, new talent, software or connected offerings
- Fill Technology Gap (NexGen program, Emerging/Disruptive Tech)
- Adjancencies, Greenhouses, and others (footholds in new untapped markets, accelerate execution, defensive measures, CTO)
Revenue Synergies
Cross Selling
Pull through of product
Technology synergies
Customer preference
Customer aversion (-)
Sales Cannibalization (-)
Contract Re-negotiation
Quantified, not included in Model
Operating Synergies
Facilities Consolidation
SG&A Reductions
Supply Chain Efficiencies
Shared Services
Best Practices
Wage & Benefits (+ or -)
Costs to Achieve
Severance
Retention
Relocation
Aset Moves
Capital
Conversation Cost
Transition
Liquidation Value
The amount of funds that would be collected if all assets and liabilities of the target company were to be sold off or settled.
Alwlays based on the amount of time
Book Value
The amount that shareholders would receive if a company’s assets, liabilities, and preferred stock were sold or paid off at exactly theamounts at which they are recorded in the company’s accounting records
Unlikely, because the use of market value may vary substantially
Enterprise Value
Is the sum of the market value of all shares outstanding, plus total debt outstanding, minus cash.
Does not incl impact of control premium not when stock is thinly traded
Discounted Cash Flow
Most detailed and justifiable ways to value a business…the acquirer constructs the expected cash flows of the target company, based on extrapolations of its historical cash flow and expectations for synergies when combining the two companies.
Multiples analysis
Compile information based on the financial information and stock prices of publicly-held companies, then convert this information into valuation multiples that are based on company performance.
