and




        present


A Summary of Mergers
   and Acquisitions
About JobSearchDigest.com
   Every day our team researches all the online job
    sources (including the specialty niche ...
About The Investment Banking Institute
   Core financial, technical and modeling skills.
   Similar to the top firms.
 ...
Table of Contents

 I. Valuation Review

 II. LBO Review

III. EPS Accretion / Dilution Model

 IV. Shortcut EPS Accretion...
Valuation Review

 Trying to answer: “What is the aggregate
  value of a company?”
     Total Enterprise Value (TEV)


...
Valuation Review (cont’d)
 Relative valuation based on applying
  multiples – Comparable Companies and
  Precedent Transa...
Valuation Review (cont’d)

 The DCF calculation represents a company’s
  “intrinsic” value using projected cash flows
 F...
Table of Contents

  I. Valuation Review

 II. LBO Review

 III. EPS Accretion / Dilution Model

 IV. Shortcut EPS Accreti...
LBO Review
 An LBO Model is an analysis used by private equity
  firms (financial sponsors) to evaluate an acquisition

...
LBO Review (cont’d)
 Leverage is largely determined by the debt markets

 Until mid-2007, the debt markets were experien...
LBO Review (cont’d)

 Typical LBO Model will contain, at a minimum,
  the following items:
   Purchase price assumptions...
Table of Contents

  I. Valuation Review


 II. LBO Review


 III. EPS Accretion / Dilution Model

 IV. Shortcut EPS Accre...
Mergers and Acquisitions Defined

   What is a merger?
   What is an acquisition?
   What is the process?
   Who is in...
EPS Accretion / Dilution Model

 Analyze the impact on the acquirer’s
  earnings per share (“EPS”) from an
  acquisition
...
EPS Accretion / Dilution Model
 Dilution of EPS could result in a drop in stock price:
    Example: current share price ...
EPS Accretion / Dilution Model
 Dilution of EPS could result in a drop in stock price:
    Example: current share price ...
EPS Accretion / Dilution Model (cont’d)

 Causes of acquirer’s stock price dilution
   The target has negative net incom...
Pop Quiz

 Which of these does NOT cause dilution of
  the acquirer’s stock price?
     a. The target has positive net i...
Pop Quiz

 Which of these does NOT cause dilution of
  the acquirer’s stock price?
     a. The target has positive net i...
Table of Contents

 I. Valuation Review

 II. LBO Review

III. EPS Accretion / Dilution Model

IV. Shortcut EPS Accretion ...
Shortcut EPS Accretion / Dilution Model

 The Shortcut Model requires much less
  information
     Obtained from public ...
Shortcut EPS Accretion / Dilution Model (cont’d)

 With this information, one can quickly assess:
     The impact on the...
Shortcut EPS Accretion / Dilution Model (cont’d)

 Keep in mind:
      Change of ownership triggers
      Consideration...
Pop Quiz

 When using short cut model, what information
  is required for both acquirer and target?
     a. Fully-dilute...
Pop Quiz

 When using short cut model, what information
  is required for both acquirer and target?
     a. Fully-dilute...
Table of Contents

 I. Valuation Review

 II. LBO Review

III. EPS Accretion / Dilution Model

IV. Shortcut EPS Accretion ...
Pre-Tax Synergies Required to Breakeven

 Analyzed if an acquisition looks to be
  dilutive to the Acquirer’s EPS
 If Ac...
Exchange Ratio / Collars
 Collars can address fluctuations in share value:
     Fixed-value collar
      – Both parties ...
Treatment of Goodwill in an Acquisition

           Purchase Price

           Less: Book Value

           = Goodwill



...
Treatment of Goodwill (cont’d)
 Acquired intangibles (patents, trademarks, etc.)
  should be recognized separately from g...
Sensitivity Tables
 Sensitivity tables can be built to illustrate the
  impact on the model for the following variables:
...
Pop Quiz

 Acquired intangibles should be
  recognized separately from goodwill:
   True
   False




                 ...
Pop Quiz

 Acquired intangibles should be
  recognized separately from goodwill:
   True
   False




                 ...
Questions and Answers




         Copyright 2009
Q&A




Q: How have current market
   conditions affected the Mergers
   and Acquisitions market?




                Copy...
Q&A


Q: What skills will M&A institutions
 be looking for?

Q: What should we focus on to
 improve ourselves?




       ...
Q&A




Q: Common pitfalls/mistakes and
   how to avoid?




               Copyright 2009
Q&A




Q: What is the focus during due
   diligence?




                Copyright 2009
and




Thank You.
About Investment Banking Institute
 The Investment Banking Institute (IBI), with offices in 14 cities
  throughout North ...
About Investment Banking Institute
 IBI is affiliated with the CFA Institute, NASBA (the national
  association of the st...
Investment Banking Institute                                Student Testimonial

 I am so thankful for the class I took at...
Investment Banking Institute
                 Please visit us at

              www.ibtraining.com
For company information...
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Mergers Acquisitions Training

  1. 1. and present A Summary of Mergers and Acquisitions
  2. 2. About JobSearchDigest.com  Every day our team researches all the online job sources (including the specialty niche sites)  We capture every Hedge Fund, Private Equity, Venture Capital and Investment Banking job  Daily email updates give you a competitive advantage in your job search www.JobSearchDigest.com Copyright 2009
  3. 3. 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
  4. 4. Table of Contents I. Valuation Review II. LBO Review III. EPS Accretion / Dilution Model IV. Shortcut EPS Accretion / Dilution Model V. Other M&A Considerations Copyright 2009
  5. 5. 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
  6. 6. 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
  7. 7. 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
  8. 8. Table of Contents I. Valuation Review II. LBO Review III. EPS Accretion / Dilution Model IV. Shortcut EPS Accretion / Dilution Model V. Other M&A Considerations Copyright 2009
  9. 9. 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
  10. 10. 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
  11. 11. 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
  12. 12. Table of Contents I. Valuation Review II. LBO Review III. EPS Accretion / Dilution Model IV. Shortcut EPS Accretion / Dilution Model V. Other M&A Considerations Copyright 2009
  13. 13. Mergers and Acquisitions Defined  What is a merger?  What is an acquisition?  What is the process?  Who is involved in the process? Copyright 2009
  14. 14. 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
  15. 15. 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
  16. 16. 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
  17. 17. 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
  18. 18. 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
  19. 19. 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
  20. 20. Table of Contents I. Valuation Review II. LBO Review III. EPS Accretion / Dilution Model IV. Shortcut EPS Accretion / Dilution Model V. Other M&A Considerations Copyright 2009
  21. 21. 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
  22. 22. 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
  23. 23. 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
  24. 24. 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
  25. 25. 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
  26. 26. Table of Contents I. Valuation Review II. LBO Review III. EPS Accretion / Dilution Model IV. Shortcut EPS Accretion / Dilution Model V. Other M&A Considerations Copyright 2009
  27. 27. 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
  28. 28. 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
  29. 29. 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
  30. 30. 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
  31. 31. 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
  32. 32. Pop Quiz  Acquired intangibles should be recognized separately from goodwill:  True  False Copyright 2009
  33. 33. Pop Quiz  Acquired intangibles should be recognized separately from goodwill:  True  False Copyright 2009
  34. 34. Questions and Answers Copyright 2009
  35. 35. Q&A Q: How have current market conditions affected the Mergers and Acquisitions market? Copyright 2009
  36. 36. Q&A Q: What skills will M&A institutions be looking for? Q: What should we focus on to improve ourselves? Copyright 2009
  37. 37. Q&A Q: Common pitfalls/mistakes and how to avoid? Copyright 2009
  38. 38. Q&A Q: What is the focus during due diligence? Copyright 2009
  39. 39. and Thank You.
  40. 40. 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
  41. 41. 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
  42. 42. 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
  43. 43. 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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