- July 27, 2020
- Posted by: anupnarsh
- Categories: Finance & accounting, Financial Modelling
At Anup N. Amatya & Associates – professional Financial, Business & Management Consultants, we advise our clients to determine profitable Mergers & Acquisitions Financial Modelling solutions.
Mergers & Acquisitions Financial Modelling Terms
Merger describes the joining together of two or more entities. If one entity acquires a majority shareholding in another, the second entity is practically acquired by the first. If the two entities join together to combine their separate identities into a new firm, then the process is identified as a merger.
- Acquirer: The firm which is purchasing a company in the acquisition (the buyer).
- Target: The firm that is acquired by the buyer is Target.
- Merger: The purchasing company acquires all of the target company shares/assets, and the target company ceases to exist.
- Acquisition: The purchasing company acquires more than 50% of the shares of the acquired company, and both companies survive, remain in existence.
- Asset Deal: The acquirer purchases only the assets of the target company (not the shares).
- Share/Stock Deal: The acquirer purchases the shares of the target company.
- Transaction Close Date: The date on which the transaction expects official completion.
- Restructuring Charges: These are fees or charges relating to early debt repayments and are part of a restructuring.
- Equity Issuance Fees: These are underwriting fees charged by investment banks to issue equity in connection with the transaction.
- Debt Issuance Fees: These are underwriting fees charged by investment banks to issue debt in connection with the transaction.
- Other Closing Costs: May include due diligence fees, legal fees, accounting fees, etc. related to the deal.
- Fully Diluted Shares Outstanding: The number of shares a company has outstanding after options, convertible securities, etc. are exercised.
- Pro Forma Shares Outstanding: The number of shares outstanding after the transaction closure and issuance of additional equity.
- Share Issuance Discount: Any discount (if any) to the current market price to determine the number of shares the target company receives.
- Synergies: Cost savings and revenue enhancements expected in connection with a merger/acquisition.
- Revenue Enhancements: Increases in revenue expected due to cross-selling, up-selling, pricing changes, etc.
- Takeover Premium: The percentage above the target’s current share price the offer price represents.
- Offer Price: The price offered per share by the acquirer.
- Cash Consideration: The portion of the purchase price given to the target in the form of cash.
- Stock Consideration: The portion of the purchase price given to the target in the form of shares of the acquirer stock.
- Share Exchange Ratio: The offer price for the target shares divided by the acquirer share price.
- Identifiable Assets: These are assets that can be assigned a fair value and can include both tangible and intangible assets.
- Net Book Value of Assets: It is the book value of assets minus book value of liabilities.
- Excess Purchase Price: The value of the purchase price over and above the net book value of assets.
- Fair Value Adjustments: The increase or decrease in the net book value of assets to arrive at the fair market value.
- Goodwill: The excess purchase price over and above the target’s net identifiable assets (after fair value adjustments).
- Accretion: It is an improvement in per-share price post transaction (after issuing additional shares).
- Dilution: A worsening of per-share price post transaction (after issuing additional shares).
- Intrinsic Value: It is the estimated value of the business using discounted cash flow analysis.
- Sensitivity Analysis: It is a method of testing how sensitive outputs in the model are to changes in certain assumptions.
Mergers & Acquisitions Example
Online Co. Inc., Salient Features:
- The Acquirer
- Seeking a multi-channel strategy
- Wants physical locations in major cities
- Does not have the expertise to open retail locations
- Has identified the best option target company
- Seeking a friendly acquisition of a Brick & Mortar Co.
- Sees synergies in Increased Revenue (through cross-selling, new brands, etc.) as well as Cost Savings (through inventory management, manufacturing, overhead, etc.)
Brick & Mortar Co., Salient Features:
- The Target
- Does not have a noteworthy online presence
- Has developed very high-performing retail locations with strong organic growth
- Has a proven track record of opening stores in new locations (Capital Growth)
- The management team is amenable to the acquisition
Strategic vs Financial Buyers
- Seek Horizontal or Vertical expansions
- Interested in identifying and delivering operating synergies such as Hard Synergies & Soft Synergies.
- Private Equity firms
- Leveraged buying for maximum equity returns
Strategic Acquisitions Involves identifying and delivering synergy
Hard synergies → Cost Synergies
- $100 of cost-saving = $100 of pre-tax profit
- Cost savings from Economies of scale, Factory overhead reduction, etc.
Soft Synergies → Revenue Synergies
- $100 of revenue synergy less than $100 of pre-tax profit
- Cross-selling opportunity
- Scope for geographic expansion
- Opportunity for corporate overhead reduction
Acquirer & Target Model steps
- Income Statement
- Balance Sheet
- Cash Flow Statement
- Supporting Schedules
- DCF Model
Mergers & Acquisitions Financial Modelling Steps (How to incorporate Acquirer & Target Co. figures)
- Revenue <- Revenue
- Cost of Goods Sold <- Raw Materials & Direct Labor
- Marketing & Advertising <- Sales, Advertising & Promotion
- General & Admin <- Office expenses, Insurance etc.
- Depreciation & Amortization <- Depreciation & Amortization
- Transaction Inputs
- Synergies & Financing
- Purchase Price
- Sources & Uses of Cash
- Purchase Price Allocation (PPA)
Building a Pro-Forma Model
Pro Forma Model = Acquirer Model + Target Model + Adjustments
Accretion & Dilution
EPS Before the Acquisition < EPS After Acquisition (Rising)
EPS Before the Acquisition > EPS After Acquisition (Falling)
EPS Impacted by From of Consideration
All Shares (EPS tend to decline)
All Cash (EPS tend to increase)
Types of Mergers & Acquisitions
- Horizontal Integration – Two entities in the same line of the business combine/merge, usually to achieve synergies.
- Vertical Integration – The acquisition of one entity by another, which, is at a different level in the Supply Chain and consist of forward and backward integration.
Forward Integration – The company acquires a target that either make use of its products to manufacture finished goods or is the retailer.
Backward Integration – The company acquires a target that produces the raw material or the ancillaries which are used by the acquirer, to ensure an uninterrupted supply of high-quality raw materials at a fair price.
- A Conglomerate – Two business in unrelated businesses combine.
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Author: Anup Narsingh Amatya