Harvard Extension Business Society
Mergers &
Acquisitions
Workshop
Quick Reference Sheet
Table of Contents
Module 1- Calculating Purchase Price through DCF ...................................................................................... 2
Step 1- WACC Calculation.......................................................................................................................... 2
Step 2 – Free Cash Flow Calculation .......................................................................................................... 2
Step 2- Calculate Enterprise Value ............................................................................................................ 3
1.
NPV of Annual Cash Flows ............................................................................................................. 3
2.
PV of Terminal Value ..................................................................................................................... 3
Step 3- Calculate Equity Value ................................................................................................................... 3
Module 2- Note on Sources & Uses Schedule ............................................................................................... 3
Module 3- Goodwill Calculation Process ....................................................................................................... 3
Step 1- Calculate Purchase Premium to Allocate ...................................................................................... 3
Step 2- Note on Write-Up Adjustments .................................................................................................... 4
Step 3- Calculation of New Deferred Tax Liability ..................................................................................... 4
Module 4- Business Combination & Accretion / Dilution Analysis ................................................................ 5
Step 1- Revenue Synergies ........................................................................................................................ 5
Step 2- COGS Associated with Revenue Synergies & COGS Synergies....................................................... 5
Step 3- Operating Adjustments ............................................................................................................. 5
Step 4- Non-Operating Adjustments ..................................................................................................... 5
Step 5- Ownership Splits Adjustments .................................................................................................. 5
Step 6- Accretion / Dilution Analysis ..................................................................................................... 5
1
Module 1- Calculating Purchase Price through DCF
Step 1- WACC Calculation
𝐷
𝐸
𝑃
𝑊𝐴𝐶𝐶 = (
) 𝑥 (1 − 𝐾𝑑 ) + (
) + 𝐾𝑒 + (
)𝐾
𝐷+𝐸+𝑃
𝐷+𝐸+𝑃
𝐷+𝐸+𝑃 𝑝



Cost of Debt:
o 𝐾𝑑 = 𝐴𝑣𝑔. 𝐵𝑜𝑟𝑟𝑜𝑤𝑖𝑛𝑔 𝐶𝑜𝑠𝑡
Cost of Equity:
o 𝐾𝑒 = 𝑅𝑓 + 𝐵(𝑅𝑚 − 𝑅𝑓 )
 𝑅𝑓 = 10𝑦𝑒𝑎𝑟 𝑦𝑖𝑒𝑙𝑑
 𝐵 = 𝑅𝑒𝑙𝑒𝑣𝑒𝑟𝑒𝑑 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 𝐵𝑒𝑡𝑎 ∗
 𝑅𝑚 = 𝐻𝑖𝑠𝑡𝑜𝑟𝑖𝑐𝑎𝑙 𝑆&𝑃 𝑟𝑒𝑡𝑢𝑟𝑛
Cost of Preferred:
o

𝐾𝑝 =
𝐷𝑖𝑣 (𝑑𝑖𝑣/𝑠ℎ𝑎𝑟𝑒)
𝑃(𝑠𝑡𝑜𝑐𝑘 𝑝𝑟𝑖𝑐𝑒)
*Unlevering & Relevering Beta
o Unlever Beta of Comps- Removes Capital Structure of all Comps
𝑈𝑛𝑙𝑒𝑣𝑒𝑟𝑒𝑑 𝐶𝑜𝑚𝑝 𝐵𝑒𝑡𝑎

𝐷
(1+ 𝑥 (1−𝑇))
𝐸
o
o
Calculate Average Unlevered Beta for Comps
Relever Beta to Target Company’s Capital Structure

𝐴𝑣𝑔. 𝑈𝑛𝑙𝑒𝑣𝑒𝑟𝑒𝑑 𝐵𝑒𝑡𝑎 𝑥 (1 +
𝐷
𝐸
Step 2 – Free Cash Flow Calculation
Earnings Before Interest * (1 – t)
+ Depreciation Expense
- Change in CAPEX
- Change in Working Capital
___________________________
= Free Cash Flow to the Firm
2
𝑥 (1 − 𝑇))
Step 3- Calculate Enterprise Value
1. NPV of Annual Cash Flows
2. PV of Terminal Value
a. Approach A: Perpetuity Growth
i. Calculate PV of Terminal FCF
1. 𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝐹𝐶𝐹 𝑥 (1 + 𝑟)/(𝑊𝐴𝐶𝐶 − 𝑟)
ii. Calculate PV of Terminal Value
1. 𝑃𝑉 𝑜𝑓 𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝐹𝐶𝐹 /(1 + 𝑊𝐴𝐶𝐶)𝑡
iii. Long-term Growth Rate: Long-term growth of Economy (GDP)
b. Approach B: Exit Year EBITDA Multiple
i. Calculate Terminal Value
1. 𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝐸𝐵𝐼𝑇𝐷𝐴 𝑥 𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 𝐸𝐵𝐼𝑇𝐷𝐴 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑒
ii. Calculate PV of Terminal Value
1. 𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 /(1 + 𝑊𝐴𝐶𝐶)𝑡
Step 4- Calculate Equity Value
𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑉𝑎𝑙𝑢𝑒 − (𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡 + 𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑆𝑡𝑜𝑐𝑘 + 𝑀𝑖𝑛𝑜𝑟𝑖𝑡𝑦 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡) + 𝐶𝑎𝑠ℎ
Module 2- Note on Sources & Uses Schedule
Since the Sources of funding must equal the uses of funding, there will be a plug used in the model,
Excess Cash Used. The calculation consists on:


𝐸𝑥𝑐𝑒𝑠𝑠 𝐶𝑎𝑠ℎ 𝑈𝑠𝑒𝑑: 𝑇𝑜𝑡𝑎𝑙 𝑈𝑠𝑒𝑠 − (𝐶𝑎𝑠ℎ 𝑈𝑠𝑒𝑑 + 𝐷𝑒𝑏𝑡 𝐼𝑠𝑠𝑢𝑒𝑑 + 𝑆𝑡𝑜𝑐𝑘 𝐼𝑠𝑠𝑢𝑒𝑑)
To calculate all sources and uses, multiply source/use by the equity purchase price
Module 3- Goodwill Calculation Process
Step 1- Calculate Purchase Premium to Allocate
Goodwill Calculation:
Equity Purchase Price:
Less: Seller Book Value (Shareholders Equity):
Plus: Write-Off of Existing Seller Goodwill:
Total Allocable Purchase Premium:
3
Step 2- Note on Write-Up Adjustments

Given that Goodwill is an asset, consider the following scenarios on the balance sheet:
Total Allocable Purchase Premium:
Less: Write-Up of PP&E:
Less: Write-Up of Intangibles:
Less: Write-Down of Deferred Tax Liabilities:
Less: Write-Down of Deferred Tax Assets
Plus: New Deferred Tax Liability:
Total Goodwill Created:
Adjustmens Rules of Thumb




Write-ups on assets:
o Subtracted from Goodwill because we need to allocate less to close the gap in the
balance sheet
Write-down of assets:
o Would be added to Goodwill because we would then need to allocate more to close the
gap in the balance sheet
Write-downs on liabilities:
o Would be subtracted from Goodwill because we need don’t to allocate as much to close
the gap in the balance sheet
Write-ups on liabilities:
o Would be added to Goodwill because we need to allocate more to close the gap in the
balance sheet
Step 3- Calculation of New Deferred Tax Liability
𝑁𝑒𝑤 𝐷𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑇𝑎𝑥 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦 (𝐷𝑇𝐿) = (𝑆𝑢𝑚 𝑜𝑓 𝐹𝑉 𝑜𝑓 𝑊𝑟𝑖𝑡𝑒 − 𝑈𝑝𝑠)𝑥(𝑏𝑢𝑦𝑒𝑟 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒)
4
Module 4- Business Combination & Accretion / Dilution Analysis
Step 1- Revenue Synergies

Calculate percentage increase based on the combined entity’s revenue
o Link revenue Synergies in Merger Model to Revenue Synergies Schedule
Step 2- COGS Associated with Revenue Synergies & COGS Synergies

COGS Associated with Revenue Synergies:
o Calculate COGS Margin of Combined Entity

𝐶𝑜𝑚𝑏𝑖𝑛𝑒𝑑 𝐶𝑂𝐺𝑆
𝐶𝑜𝑚𝑏𝑖𝑛𝑒𝑑 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠
o

Calculate Combined COGS
 𝐶𝑂𝐺𝑆 𝑀𝑎𝑟𝑔𝑖𝑛 𝑥 𝐶𝑜𝑚𝑏𝑖𝑛𝑒𝑑 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
COGS Synergies
o Link to COGS Synergies in Synergies Schedule
o Important: Recall that COGS Synergies are in the form of improved margins
Step 3- Operating Adjustments


OpEx Synergies
o Link to OpEx Synergies in Synergies Schedule
o Important: Recall that OpEx Synergies are in the form of improved margins
Amortization of New Intangibles (Definite-Lived)
o

𝐼𝑛𝑡𝑎𝑛𝑔𝑖𝑏𝑙𝑒𝑠 𝑊𝑟𝑖𝑡𝑒𝑈𝑝
𝐼𝑛𝑡𝑎𝑛𝑔𝑖𝑏𝑙𝑒𝑠 𝐴𝑚𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑃𝑒𝑟𝑖𝑜𝑑
Depreciation from PP&E Write-Up
o
𝑃𝑃&𝐸 𝑊𝑟𝑖𝑡𝑒𝑈𝑝
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑃𝑒𝑟𝑖𝑜𝑑
Step 4- Non-Operating Adjustments



Foregone Interest on Cash: The opportunity cost of using the cash to fund the transaction
o 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑜𝑛 𝐶𝑎𝑠ℎ 𝑥 (𝐶𝑎𝑠ℎ 𝑈𝑠𝑒𝑑 + 𝐸𝑥𝑐𝑒𝑠𝑠 𝐶𝑎𝑠ℎ 𝑈𝑠𝑒𝑑)
Interest Paid on New Debt Issued:
o 𝐷𝑒𝑏𝑡 𝐼𝑠𝑠𝑢𝑒𝑑 𝑥 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒 𝑜𝑛 𝑁𝑒𝑤 𝐷𝑒𝑏𝑡
Amortization of Financing Fees:
o
𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑒𝑑 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑛𝑔 𝐹𝑒𝑒𝑠
𝐴𝑚𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑃𝑒𝑟𝑖𝑜𝑑
Step 5- Ownership Splits Adjustments

New Shares Issued:
o
𝑇𝑎𝑟𝑔𝑒𝑡 𝑆ℎ𝑎𝑟𝑒 𝑃𝑟𝑖𝑐𝑒 𝑥 𝐸𝑞𝑢𝑖𝑡𝑦 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑃𝑟𝑖𝑐𝑒
𝐴𝑐𝑞𝑢𝑖𝑟𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝑃𝑟𝑖𝑐𝑒
Step 6- Accretion / Dilution Analysis

Calculate Acquirer Standalone EPS
o


𝑁𝑒𝑡𝐼𝑛𝑐𝑜𝑚𝑒
𝑇𝑜𝑡𝑎𝑙 𝐷𝑖𝑙𝑢𝑡𝑒𝑑 𝑆ℎ𝑎𝑟𝑒𝑠
Calculate Combined Entity EPS
o Diluted shares based on acquirers projected diluted shares
Accretion / Dilution Calculation
5
o
Change in Dollar Value 𝐶𝑜𝑚𝑏𝑖𝑛𝑒𝑑 𝐸𝑛𝑡𝑖𝑡𝑦 𝐸𝑃𝑆 − 𝐴𝑞𝑢𝑖𝑟𝑒𝑟 𝑆𝑡𝑎𝑛𝑑𝑎𝑙𝑜𝑛𝑒 𝐸𝑃𝑆
o
Change in % Basis 𝐴𝑐𝑞𝑢𝑖𝑟𝑒𝑟 𝑆𝑡𝑎𝑛𝑑𝑎𝑙𝑜𝑛𝑒 𝐸𝑃𝑆
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐷𝑜𝑙𝑙𝑎𝑟 𝐵𝑎𝑠𝑖𝑠
6