Advanced Financial Modeling
Mergers and Acquisitions (M&A)
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Table of Contents
01.
02.
03.
04.
05.
Introduction
M&A Model
Overview
Acquirer & Target
Models
Deal Assumptions
Closing Balance Sheet
06.
07.
08.
Pro Forma Model
Accretion & Dilution
Summary & Sensitivity
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Tim Vipond
Justin Sanders
Scott Powell
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Vancouver
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London
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Vancouver
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Ryan Spendelow
Director & Instructor
New York
Instructor
Hong Kong
Career Map
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trading
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management
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accounting
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Corporate
development
Advanced Financial Modeling
Operating Models
• Focus on revenue build up
• Focus on operating costs and capital
cost build up
• Consolidation of many business units
• Focus on drivers, unit economics,
internal value creation
• Risk management
• Financial planning & analysis
Leveraged Buyouts
Mergers & Acquisitions
• Detail around debt and capital
structure modeling
• High degree of detail around the
Pro Forma model
• Focus on covenant modeling for
lenders
• Analysis of synergies, revenue
enhancements, cost structures
• Complex structures for rate of
return analysis by investor type
• Integration considerations
• Focus is on financial structuring,
as opposed to operations
• Accretion / Dilution analysis
• Deal terms and structuring
• Focus on the strategic impact of
combining the businesses
• Share price impact
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Course Objectives
01.
Learn how to structure an
M&A model with the most
efficient way
02.
Setup all the assumptions
and drivers required to
buildout the M&A model
03.
Calculate all the necessary
adjusting entries required to create
a post-transaction balance sheet
04.
Integrate the acquirer and the
target into a pro form model
05.
Calculate the accretion or
dilution of key per share
metrics post transaction
06.
Perform sensitivity analysis on key
assumptions and assess the overall
impact of the transaction
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M&A Model Overview
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Terms and definitions
Mergers & Acquisitions – General Transaction Terms
Acquirer
Transaction Close Date
The firm which is purchasing a company in the acquisition (the buyer)
The date on which the transaction is expected to be officially completed
Target
Restructuring Charges
The firm that is being acquired (the seller)
Any fees or charges related to early debt repayments that are part of a restructuring
Merger
Equity Issuance Fees
The purchasing company acquires all of the target company
shares/assets the target company ceases to exist (acquirer survives)
Underwriting fees changed by investment banks to issue
equity in connection with the transaction
Acquisition
Debt Issuance Fees
The purchasing company acquires more than 50% of the shares of the
acquired company and both companies survive (both companies survive).
Underwriting fees changed by investment banks to issue debt in
connection with the transaction
Asset Deal
Other Closing Costs
The acquirer purchases only the assets of the target company (not it’s shares)
This may include due diligence fees, legal fees, accounting fees, etc.
related to the deal
Share/Stock Deal
The acquirer purchases the shares of the target company
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Terms and definitions
Mergers & Acquisitions – Deal Consideration and Synergies
Fully Diluted Shares Outstanding
Timing of Synergies
The number of shares a company has outstanding after
options, convertible securities, etc. are exercised
How long it is estimated to take to realized the synergies in the transaction
Pro Forma Shares Outstanding
The number of shares outstanding after the transaction has closed
and additional equity has been issued
Takeover Premium
the percentage above the targets current share price (or VWAP) the offer
price represents
Share Issuance Discount
Offer Price
Any discount (if any) to the current market price that will be used
to determine the # of share the target receives
The price offered per share by the acquirer
VWAP
Cash Consideration
Volume Weighted Average Price, often used reference to the
takeover premium (i.e. 15% above the 20-Day VWAP)
The portion of the purchase price given to the target in the form of cash
Synergies
Stock Consideration
Cost savings and revenue enhancements that are expected to be
achieved in connection with a merger/acquisition
The portion of the purchase price given to the target in the form of
shares of the acquirer’s stock
Revenue Enhancements
Share Exchange Ratio
Increases in revenue that are expected due to cross-selling,
up-selling, pricing changes, etc.
The offer price for the targets shares divided by the
acquirer's share price.
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Terms and definitions
Mergers & Acquisitions – Purchase Price Allocation and Deal Metrics
Identifiable Assets
Purchase Price Allocation
An asset that can be assigned a fair value and can include both
tangible and intangible assets.
The breakdown of the total purchase price between
net identifiable assets and goodwill
Net Book Value of Assets
Accretion
Book value of assets minus book value of liabilities
An improvement in per share metrics post transaction
(after issuing additional shares)
Excess Purchase Price
Dilution
The value of the purchase price over and above the net book value of
assets (total purchase price minus net book value of assets)
A worsening of per share metrics post transaction
(after issuing additional shares)
Fair Value Adjustments
Intrinsic Value
The increase or decrease in the net book value of assets to
arrive at the fair market value
The estimated value of the business using discounted cash flow
analysis (often on a per share basis)
Goodwill
Sensitivity Analysis
The excess purchase price over and above the target’s net
identifiable assets (after fair value adjustments)
A method of testing how sensitive certain outputs in the model are to
changes in certain assumptions
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M&A case study
Online Company Inc.
Brick ‘n’ Mortar Co.
• The acquirer
• The target
• Seeking a multi-channel strategy
• Has a lackluster online presence
• Wants physical locations in major cities
• Developed very high-performing retail
locations with strong same-store sales
growth (i.e. organic growth)
• Does not have internal expertise to open
retail locations
• Has identified targets and found the
“best” option
• Seeking a friendly acquisition of Brick ‘n’
Mortar Co.
• Sees synergies in both increased revenue
(cross-selling, new brands, etc.) and cost
savings (inventory management,
manufacturing, overhead)
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• Has a proven track record of opening
new locations in major cities (i.e. capital
growth)
• Management team is amenable to
transaction and has presented it the
offer to their board of directors
• Key members of the team would stay on
for at least 1-3 years as part of the
transition
Pro Forma Business
• 2-3% increase in revenue due to
cross-selling, pricing, etc.
• ~8% reduction in cost structure due
to savings in COGS, marketing and
G&A / overhead
• Ability to significantly increase in
leverage in pro forma business
• Makes a great deal of strategic sense
• Accretive to key per share metrics
• Significant value creation expected
Table of Contents
01.
02.
03.
04.
05.
Introduction
M&A Model
Overview
Acquirer & Target
Models
Deal Assumptions
Closing Balance Sheet
06.
07.
08.
Pro Forma Model
Accretion & Dilution
Summary & Sensitivity
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M&A Process
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10 step M&A process
10
9
8
7
6
5
4
3
2
1
Acquisition
Strategy
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Acquisition
Criteria
Searching
for Target
Early
Discussion
Valuing &
Evaluating
Due
Diligence
Negotiation
Financing
Purchase &
Sales Contract
Integration
M&A templates and resources
Here are some of the most common templates and resources required
for each step of an acquisition
❑ NDA / Confidentiality agreement
❑ Confidential Information Memorandum (CIM)
❑ Financial Model (included in this course)
❑ Due Diligence Checklist
❑ Due Diligence Report
❑ Definitive Purchase Agreement
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Strategic versus financial buyers
This
course
Strategic buyers
VS
LBO
course
Financial buyers
• Horizontal or vertical expansions
• Private equity
• Involves identifying and delivering
operating synergies
• Leverage for maximum equity returns
• Hard synergies – cost synergies
• Soft synergies – revenue synergies
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Strategic acquisitions
Involves identifying and delivering synergies
• Hard synergies → cost synergies
• Soft synergies → revenue synergies
• $1 of cost saving = $1 of pre-tax
• $1 of revenue synergy less than $1 of
profit
pre-tax profit
• Cost savings from
• Cross selling
• Economies of scale
• Geographic expansion
• Factory overhead reduction
• Corporate overhead reduction
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M&A model conceptual representation
Synergies
Transaction
costs
Value Created
(Benefit)
Standalone
enterprise
value
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Consideration
Paid
Total Net
Value of
the
Target
Business
M&A model conceptual representation
Synergies
Standalone
enterprise
value
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Value Lost
Transaction
costs
Total Net
Value of
the Target
Business
Consideration
Paid
M&A Modeling Steps
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M&A financial modeling steps
Acquirer & Target Models
Map financials, 3statement model,
DCF model
Deal Assumptions
Inputs, synergies,
financing, sources/uses,
PPA
Accretion/Dilution
Pro forma per share
metrics
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Closing Balance Sheet
Acquirer + target,
adjustments, pro forma
Sensitivity Analysis
Intrinsic value per share,
changes in assumptions
Pro Forma Model
Combination, synergies,
3-statement, DCF
Acquirer & Target
Models
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Acquirer model steps
Acquirer Model
• Assumptions
• Income Statement
• Balance Sheet
• Cash Flow Statement
• Supporting Schedules
• DCF Model
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Target model steps
Target Model
• Assumptions
• Income Statement
• Balance Sheet
• Cash Flow Statement
• Supporting Schedules
• DCF Model
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M&A financial modeling steps
Revenue
Cost of Goods Sold
Marketing, Advertising &
Promotion
General & Administrative
Depreciation & Amortization
Revenue
Raw Materials
Direct Labor
Sales
Advertising
Promotion
Office Expense
Insurance
Depreciation & Amortization
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Deal Assumptions
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Deal Assumptions
Deal Assumptions
• Transaction Inputs
• Scenarios (Synergies & Financing)
• Purchase Price
• Sources & Uses of Cash
• Purchase Price Allocation (PPA)
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Closing Balance
Sheet
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Closing balance sheet
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Pro Forma
Model
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Building a pro forma model
Pro Forma
Model
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Acquirer
Model
Target
Model
Adjustments
Accretion & Dilution
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Accretion & Dilution
Accretive
EPS Before
Acquisition
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EPS After
Acquisition
Dilutive
EPS Before
Acquisition
EPS After
Acquisition
Accretion & Dilution
EPS Impacted by From of Consideration
All Cash
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All Shares
Summary & Sensitivity
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Sensitivity Analysis
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M&A Data – PitchBook and
Capital IQ
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Pitchbook and Capital IQ
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