This document provides a summary of key considerations for mergers and acquisitions. It discusses valuation methodologies like comparable company analysis, precedent transactions analysis, and discounted cash flow analysis. It also reviews leveraged buyout models, earnings per share accretion/dilution models, and other factors like pre-tax synergies required and exchange ratio collars.

1. and
present
A Summary of Mergers
and Acquisitions

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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
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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
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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
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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
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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
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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%
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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
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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
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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
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13. Mergers and Acquisitions Defined
 What is a merger?
 What is an acquisition?
 What is the process?
 Who is involved in the process?
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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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
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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
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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
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32. Pop Quiz
 Acquired intangibles should be
recognized separately from goodwill:
 True
 False
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33. Pop Quiz
 Acquired intangibles should be
recognized separately from goodwill:
 True
 False
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34. Questions and Answers
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35. Q&A
Q: How have current market
conditions affected the Mergers
and Acquisitions market?
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36. Q&A
Q: What skills will M&A institutions
be looking for?
Q: What should we focus on to
improve ourselves?
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37. Q&A
Q: Common pitfalls/mistakes and
how to avoid?
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38. Q&A
Q: What is the focus during due
diligence?
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39. and
Thank You.

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41. About Investment Banking Institute
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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
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Thank you very much.
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