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1、 STREETOFWALLS Update MERGERS ACQUISITIONS M A VALUATION of Investment Banking Technical Training In this Mergers Acquisitions M A Valuation module we will describe the background for M A banking that most investment bankers will need to know particularly from the perspective of valuation We will co
2、ver three key topics M A Overview Building an M A Model Accretion Dilution Analysis M A Overview There are a variety of ways to value a company The valuation methods include Each of these topics including Acquisition Comparables is very important in investment banking and is discussed in a previous
3、module in this training course In this module we will concentrate on Merger Analysis also known as Merger Consequences Analysis M A BACKGROUND A merger is the combining or pooling of two businesses while an acquisition is the purchase ARTICLESTRAINING of the ownership of one business by another Pool
4、ing of Interest Accounting which is how mergers used to be accounted for is no longer allowed by the Financial Accounting Standards Board FASB in the US and was also disallowed by the International Accounting Standards Board IASB for international companies As a result M A transactions must now be a
5、ccounted for using the Acquisition Method of Accounting a slightly revised version of the Purchase Method of Accounting This all can be very confusing because the word Mergers is frequently used to describe either type of combination of two business but all combinations must now be treated as the pu
6、rchase of one company by another in other words as Acquisitions Regardless M A banking involves analysis for scenarios in which one company the Buyer proposes to offer cash or its own common stock in order to purchase the common stock of another company the Seller or the Target M A typically require
7、s the target company s Board of Directors and its shareholders approval except in the case of a Hostile Takeover in which one company acquires enough stock in another company to control it against the wishes of the target s management and or shareholders REASONS FOR PURSUING M A M A is a corporate s
8、trategy that may increase value for the acquirer by creating an important value driver known as Synergies ways to increase profit earnings through an acquisition among other reasons Synergies can arise from an M A transaction for a variety of reasons Increase and diversify sources of revenue by the
9、acquisition of new and complementary product and service offerings Revenue Synergies Increase production capacity through acquisition of workforce and facilities Operational Synergies Increase market share and economies of scale Revenue Synergies Cost Synergies Reduction of financial risk and potent
10、ially lower borrowing costs Financial Synergies Increase operational efficiency and expertise Operational Synergies Cost Synergies Increase Research Development expertise and programs Operational Synergies Cost Synergies The acquisition of another company may also be defensive in nature For example
11、a large company may wish to acquire a small but growing company if the small company has a substantial competitive advantage over the large company such as an important technology or patent or superior product offering This may protect the acquirer from serious competitive consequences as the small
12、company may over time be able to grow on its own and eat into the large company s business MERGER ANALYSIS Investment bankers put together merger models to analyze the financial profile of two combined companies The primary goal of the investment banker is to figure out whether the buyer s earnings
13、per share EPS will increase or decrease as a result of the merger An increase in expected EPS from a merger is called Accretion and such an acquisition is called an Accretive Acquisition and a decrease in expected EPS from a merger is called Dilution and such an acquisition is called a Dilutive Acqu
14、isition A Merger Consequences Analysis consists of the following key valuation outputs Analysis of Accretion Dilution and balance sheet impact based on pro forma acquisition results Analysis of Synergies Type of Consideration offered and how this will impact results i e Cash vs Stock Goodwill creati
15、on and other Balance Sheet adjustments Transaction fees These will all be encapsulated in the M A Model discussed in the next section An investment banker begins to evaluate a potential M A transaction by referring to a set of questions that will likely include the following Who is the Seller Public
16、ly traded stock or privately held Insider ownership or sizable public float i e is a large portion of the company s shares available for sale in the open market Who are the potential Buyers Strategic Buyer an existing company able to gain from potential synergies Financial Sponsor a Private Equity firm looking to generate an attractive return via a Leveraged Buyout What is the context of the transaction Privately negotiated sale or auction Hostile or friendly takeover What are the market conditi
