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

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

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 … Read moreWould a seller prefer a stock purchase or an asset purchase? What about the buyer?

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 … Read moreWhat are the main 3 transaction structures you could use to acquire another company?

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

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 … Read moreNormally 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?

How would I calculate “break-even synergies” in an M&A deal and what does the number mean?

To do this, you would set the EPS accretion / dilution to $0.00 and then back-solve in Excel to get the required synergies to make the deal neutral to EPS. It’s important because you want an idea of whether or not a deal “works” mathematically, and a high number for the break-even synergies tells you … Read moreHow would I calculate “break-even synergies” in an M&A deal and what does the number mean?

How would an accretion / dilution model be different for a private seller?

The mechanics are the same, but the transaction structure is more likely to be an asset purchase or 338(h)(10) election; private sellers also don’t have Earnings Per Share so you would only project down to Net Income on the seller’s Income Statement. Note that accretion / dilution makes no sense if you have a private … Read moreHow would an accretion / dilution model be different for a private seller?

What’s an Earnout and why would a buyer offer it to a seller in an M&A deal?

An Earnout is a form of “deferred payment” in an M&A deal – it’s most common with private companies and start-ups, and is highly unusual with public sellers. It is usually contingent on financial performance or other goals – for example, the buyer might say, “We’ll give you an additional $10 million in 3 years … Read moreWhat’s an Earnout and why would a buyer offer it to a seller in an M&A deal?

Walk me through the most important terms of a Purchase Agreement in an M&A deal.

There are dozens, but here are the most important ones: • Purchase Price: Stated as a per-share amount for public companies. • Form of Consideration: Cash, Stock, Debt… • Transaction Structure: Stock, Asset, or 338(h)(10) • Treatment of Options: Assumed by the buyer? Cashed out? Ignored? • Employee Retention: Do employees have to sign non-solicit … Read moreWalk me through the most important terms of a Purchase Agreement in an M&A deal.