Mergers Acquisitions Training

and present A Summary of Mergers and Acquisitions

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About The Investment Banking Institute  Core financial, technical and modeling skills.  Similar to the top firms.  4 Weeks of training – 28 hours of live, in-class instruction, – Taught by current and former investment bankers.  Wide range of topics.  Classes monthly in major cities across the US, Canada and Europe.  Visit www.ibtraining.com for additional details. Copyright 2009

Valuation Review  Trying to answer: “What is the aggregate value of a company?”  Total Enterprise Value (TEV)  Commonly Used Valuation Methodologies  Comparable Company Analysis  Precedent Transactions Analysis  Discounted Cash Flow (DCF) Analysis Copyright 2009

Valuation Review (cont’d)  Relative valuation based on applying multiples – Comparable Companies and Precedent Transactions  A valuation multiple is a ratio between a value and an operating metric – example: P/E ratio; price = value, earnings = operating metric – P/E = 25.5x, Earnings = $30 million; MVE = ?  There are 2 types of trading multiples  Operating (debt-free): TEV / Revenue, TEV/EBIT or TEV/EBITDA  Equity: Price/Earnings Copyright 2009

Valuation Review (cont’d)  The DCF calculation represents a company’s “intrinsic” value using projected cash flows  Four basic steps:  Forecast Free Cash Flows (FCF)  Estimate Cost of Capital (typically WACC)  Estimate Terminal (EBITDA Multiple or Gordon Growth approach)  Calculate Results  TEV = Sum of PV of Period Cash Flows + PV of Terminal Value Copyright 2009

LBO Review  An LBO Model is an analysis used by private equity firms (financial sponsors) to evaluate an acquisition  The goal of an LBO is to acquire a company by financing the purchase with as much debt as cash flow and debt markets will support  The goal of an LBO model is to establish expected internal rates of return (“IRR”) for the transaction  Private Equity Firms / Financial Sponsors usually have a required rate of return hurdle of 18-25% Copyright 2009

LBO Review (cont’d)  Leverage is largely determined by the debt markets  Until mid-2007, the debt markets were experiencing excess liquidity  Lenders were allowing higher leverage  In 2005-2007 leveraged at 4.0–6.0x recent EBITDA  Leverage is comprised of some combination of:  Senior secured loans  Junior loans/bonds  Mezzanine debt, or “hybrid” securities  LBO models also evaluated by lenders Copyright 2009

LBO Review (cont’d)  Typical LBO Model will contain, at a minimum, the following items:  Purchase price assumptions  Uses of Cash Schedule  Sources of Cash Schedule  Capital Structure Alternatives  Pro Forma Balance Sheet  Integrated Financial Model  IRR Analyses Copyright 2009

EPS Accretion / Dilution Model  Analyze the impact on the acquirer’s earnings per share (“EPS”) from an acquisition  Primarily used for public acquirers and targets  Financial markets pay close attention to expected EPS dilution resulting from an acquisition Copyright 2009

EPS Accretion / Dilution Model  Dilution of EPS could result in a drop in stock price:  Example: current share price of $10 and EPS of $1; P/E of 10.0x  If a 10% EPS dilution occurs (EPS drops to $0.90, and the P/E ratio remains at 10.0x), the stock price would fall to $9 Copyright 2009

EPS Accretion / Dilution Model  Dilution of EPS could result in a drop in stock price:  Example: current share price of $10 and EPS of $1; P/E of 10.0x  If a 10% EPS dilution occurs (EPS drops to $0.90, and the P/E ratio remains at 10.0x), the stock price would fall to $9 10% EPS Dilution Copyright 2009

EPS Accretion / Dilution Model (cont’d)  Causes of acquirer’s stock price dilution  The target has negative net income  Acquirer borrows the cash to fund purchase of the stock, resulting in increased interest expense  Acquirer uses balance sheet cash to fund a portion purchase price  A large amount of new amortizable intangibles  Target has a higher P/E multiple than the acquirer Copyright 2009

Pop Quiz  Which of these does NOT cause dilution of the acquirer’s stock price?  a. The target has positive net income  b. Acquirer borrows the cash to fund purchase of the stock  c. Acquirer uses balance sheet cash to fund a portion purchase price  d. A large amount of new amortizable intangibles Copyright 2009

Shortcut EPS Accretion / Dilution Model  The Shortcut Model requires much less information  Obtained from public filings, research reports and press releases  Required information for both the acquirer and target:  Fully-diluted shares  Current share prices  Current balance sheets  LTM and forward Earnings Per Share  Additional information on the offer Copyright 2009

Shortcut EPS Accretion / Dilution Model (cont’d)  With this information, one can quickly assess:  The impact on the acquirer’s LTM and forward EPS  Pro-forma ownership structure  Pre-tax synergies required to breakeven – Therefore resulting in no EPS dilution  Assess other potential structures – May result in less dilution to the acquirer’s EPS – Would have the same economics for the target shareholders Copyright 2009

Shortcut EPS Accretion / Dilution Model (cont’d)  Keep in mind:  Change of ownership triggers  Consideration used to finance the purchase – Acquirer issues new stock or pays cash, or combination – The cash portion of the offer has to be financed  Pro-forma Ownership – the Acquirer want to keep control Copyright 2009

Pop Quiz  When using short cut model, what information is required for both acquirer and target?  a. Fully-diluted shares  b. Current share prices  c. Current balance sheets  d. LTM and forward Earnings Per Share  e. All of the above Copyright 2009

Pre-Tax Synergies Required to Breakeven  Analyzed if an acquisition looks to be dilutive to the Acquirer’s EPS  If Acquirer achieves this amount in synergies, then the acquisition may not be considered dilutive  The amount is often measured as a % of revenues and % of EBITDA to determine if feasible Copyright 2009

Exchange Ratio / Collars  Collars can address fluctuations in share value:  Fixed-value collar – Both parties agree on an acceptable price range for the acquirer’s stock. – Exchange ratio will not fall below the floor or exceed the cap.  Fixed-share collar – Acquirer delivers a specific number of shares for each target share. – Parties agree upon a pricing range for those shares.  Reciprocal right of termination – If acquirer’s stock price rises well above the fixed-value collar’s highest reference price, or – Drops below the lowest reference price. Copyright 2009

Treatment of Goodwill in an Acquisition Purchase Price Less: Book Value = Goodwill  Goodwill is separated into two buckets  Intangibles that can be amortized, and  That which cannot be amortized Copyright 2009

Treatment of Goodwill (cont’d)  Acquired intangibles (patents, trademarks, etc.) should be recognized separately from goodwill and amortized over their definite life if:  the intangible arises from a contractual or legal right  the intangible can be separated or divided from the acquired entity and can be sold, transferred, licensed, rented or exchanged  the intangible has a definite life  Goodwill and Intangibles that do not have a definite life are not amortized  tested annually for impairment Copyright 2009

Sensitivity Tables  Sensitivity tables can be built to illustrate the impact on the model for the following variables:  Range of share price paid / premium to current share price  Range of considerations (cash / equity) for acquisition  Range of options for how cash portion is financed (new debt, b/s cash)  Price / Earnings Ratios  Accretion / (Dilution) to EPS  Proforma Ownership of Acquirer and Target Shareholders  Pre-tax synergies required to breakeven Copyright 2009

and Thank You.

About Investment Banking Institute  The Investment Banking Institute (IBI), with offices in 14 cities throughout North America and Europe, conducts corporate as well as individual training for candidates ranging from Managing Directors to MBAs to College Undergrads and other professionals seeking to enter the industry. Since our inception in 2002, IBI has offered the most comprehensive course syllabus and longest running program available  IBI conducts more individual based programs in more cities than any other firm. Last year alone (2008) we held over 700 sessions worldwide for more than 2000 live training hours; moreover, our bankers/instructors possess a combined 129 years of I-banking and/or PE experience Copyright 2009

About Investment Banking Institute  IBI is affiliated with the CFA Institute, NASBA (the national association of the state boards of accountancy –overseeing CPAs), and the CFP Board  IBI has trained analysts and associates for hundreds of organizations (a partial list can be viewed on our website), the in-class training we provide our individual students is the same exact training provided to corporate clients  Interview preparation, resume revision, and job contacts are available through our Human Resources division on a one-on- one basis with no set expiration date  The training program can be repeated free of charge at any future date to ensure your skills are sharp when you need them to be  Seasoned Investment Bankers are available for help outside of class whenever needed Copyright 2009

Investment Banking Institute Student Testimonial I am so thankful for the class I took at the Investment Banking Institute. It was both an enriching knowledge vault and a confidence booster! Your walkthrough of the DCF calculations was an excellent refresher. While I still remember bits and pieces of how DCF works from my on-campus interviews back in college and work at JP Morgan, your presentation helped to consolidate everything in my mind. I also appreciate how you tied things back to an estimate of the company's stock price at the end -- I actually once got an interview question on that exact topic! The details and examples of the LBO modeling were extremely helpful, and the encouragement you gave students throughout the class was equally invaluable. A huge thank-you for your insight into current market conditions, and on how the subprime crisis actually unfolded. Although I manage to gain exposure to macroeconomic and market valuation issues at work every day at JP Morgan, it was your engaging, concise teaching method and holistic approach to the course that put everything in perspective for me. I will definitely recommend your course to my future classmates at Harvard Business School as I am sure they will benefit tremendously from it. Thank you very much. Anthony, Boston Copyright 2009

Investment Banking Institute Please visit us at www.ibtraining.com For company information, banker’s bios, and contact information for any of our local offices Headquarters: The Helmsley Building 230 Park Avenue, 10th Floor New York, NY 10169 212-380-7027 Copyright 2009

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Mergers Acquisitions Training

by Private Equity Jobs on Dec 13, 2009

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Mergers Acquisitions Training — Presentation Transcript