Mergers

How do you account for transaction costs, financing fees, and miscellaneous expenses in a merger model?

In the “old days” you used to capitalize these expenses and then amortize them; with the new accounting rules, you’re supposed to expense transaction and miscellaneous fees upfront, but capitalize the financing fees and amortize them over the life of the debt. Expensed transaction fees come out of Retained Earnings when you adjust the Balance …

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Explain what a contribution analysis is and why we might look at it in a merger model.

A contribution analysis compares how much revenue, EBITDA, Pre-Tax Income, cash, and possibly other items the buyer and seller are “contributing” to estimate what the ownership of the combined company should be. For example, let’s say that the buyer is set to own 50% of the new company and the seller is set to own …

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Would a seller prefer a stock purchase or an asset purchase? What about the buyer?

A seller almost always prefers a stock purchase to avoid double taxation and to get rid of all its liabilities. The buyer almost always prefers an asset deal so it can be more careful about what it acquires and to get the tax benefit from being able to deduct depreciation and amortization of asset write-ups …

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What are the main 3 transaction structures you could use to acquire another company?

Stock Purchase, Asset Purchase, and 338(h)(10) Election. The basic differences: Stock Purchase: • Buyer acquires all asset and liabilities of the seller as well as off-balance sheet items. • The seller is taxed at the capital gains tax rate. • The buyer receives no step-up tax basis for the newly acquired assets, and it can’t …

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How do you handle options, convertible debt, and other dilutive securities in a merger model?

The exact treatment depends on the terms of the Purchase Agreement – the buyer might assume them or it might allow the seller to “cash them out” assuming that the per-share purchase price is above the exercise prices of these dilutive securities. If you assume they’re exercised, then you calculate dilution to the equity purchase …

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Normally in an accretion / dilution model you care most about combining both companies’ Income Statements. But let’s say I want to combine all 3 financial statements – how would I do this?

You combine the Income Statements like you normally would (see the previous question on this), and then you do the following: 1. Combine the buyer’s and seller’s balance sheets (except for the seller’s Shareholders’ Equity number). 2. Make the necessary Pro-Forma Adjustments (cash, debt, goodwill/intangibles, etc.). 3. Project the combined Balance Sheet using standard assumptions …

Normally in an accretion / dilution model you care most about combining both companies’ Income Statements. But let’s say I want to combine all 3 financial statements – how would I do this? Read More »