Mergers & Acquisitions Workshop



Harvard Extension Business SocietyMergers & Acquisitions WorkshopQuick Reference SheetTable of Contents TOC \o "1-3" \h \z \u Module 1- Calculating Purchase Price through DCF PAGEREF _Toc444308057 \h 2Step 1- WACC Calculation PAGEREF _Toc444308058 \h 2Step 2 – Free Cash Flow Calculation PAGEREF _Toc444308059 \h 2Step 2- Calculate Enterprise Value PAGEREF _Toc444308060 \h 31.NPV of Annual Cash Flows PAGEREF _Toc444308061 \h 32.PV of Terminal Value PAGEREF _Toc444308062 \h 3Step 3- Calculate Equity Value PAGEREF _Toc444308063 \h 3Module 2- Note on Sources & Uses Schedule PAGEREF _Toc444308064 \h 3Module 3- Goodwill Calculation Process PAGEREF _Toc444308065 \h 3Step 1- Calculate Purchase Premium to Allocate PAGEREF _Toc444308066 \h 3Step 2- Note on Write-Up Adjustments PAGEREF _Toc444308067 \h 3Step 3- Calculation of New Deferred Tax Liability PAGEREF _Toc444308068 \h 4Module 4- Business Combination & Accretion / Dilution Analysis PAGEREF _Toc444308069 \h 4Step 1- Revenue Synergies PAGEREF _Toc444308070 \h 4Step 2- COGS Associated with Revenue Synergies & COGS Synergies PAGEREF _Toc444308071 \h 4Step 3- Operating Adjustments PAGEREF _Toc444308072 \h 4Step 4- Non-Operating Adjustments PAGEREF _Toc444308073 \h 5Step 5- Ownership Splits Adjustments PAGEREF _Toc444308074 \h 5Step 6- Accretion / Dilution Analysis PAGEREF _Toc444308075 \h 5Module 1- Calculating Purchase Price through DCFStep 1- WACC CalculationWACC= DD+E+Px (1-Kd)+ED+E+P+Ke+PD+E+PKpCost of Debt:Kd=Avg. Borrowing CostCost of Equity:Ke= Rf+B(Rm-Rf)Rf=10year yieldB=Relevered Industry Beta*Rm=Historical S&P returnCost of Preferred:Kp=Div (div/share)P(stock price)*Unlevering & Relevering BetaUnlever Beta of Comps- Removes Capital Structure of all CompsUnlevered Comp Beta1+DE x 1-TCalculate Average Unlevered Beta for CompsRelever Beta to Target Company’s Capital StructureAvg. Unlevered Beta x 1+DE x 1-TStep 2 – Free Cash Flow CalculationEarnings Before Interest * (1 – t) +Depreciation Expense - Change in CAPEX -Change in Working Capital ___________________________ =Free Cash Flow to the FirmStep 3- Calculate Enterprise Value NPV of Annual Cash Flowsleft28575PV of Terminal ValueApproach A: Perpetuity GrowthCalculate PV of Terminal FCFTerminal FCF x (1+r)/(WACC-r)Calculate PV of Terminal ValuePV of Terminal FCF /1+WACCtLong-term Growth Rate: Long-term growth of Economy (GDP)Approach B: Exit Year EBITDA MultipleCalculate Terminal ValueTerminal EBITDA x Terminal Value EBITDA MultipleCalculate PV of Terminal ValueTerminal Value /1+WACCtStep 4- Calculate Equity Value Enterprise Value-(Total Debt+Preferred Stock+Minority Interest)+CashModule 2- Note on Sources & Uses ScheduleSince 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 IssuedTo calculate all sources and uses, multiply source/use by the equity purchase priceModule 3- Goodwill Calculation ProcessStep 1- Calculate Purchase Premium to AllocateGoodwill Calculation:Equity Purchase Price:Less: Seller Book Value (Shareholders Equity):Plus: Write-Off of Existing Seller Goodwill:Total Allocable Purchase Premium:Step 2- Note on Write-Up AdjustmentsGiven 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 AssetsPlus: New Deferred Tax Liability:Total Goodwill Created:?Adjustmens Rules of ThumbWrite-ups on assets:Subtracted from Goodwill because we need to allocate less to close the gap in the balance sheetWrite-down of assets:Would be added to Goodwill because we would then need to allocate more to close the gap in the balance sheetWrite-downs on liabilities:Would be subtracted from Goodwill because we need don’t to allocate as much to close the gap in the balance sheetWrite-ups on liabilities:Would be added to Goodwill because we need to allocate more to close the gap in the balance sheetStep 3- Calculation of New Deferred Tax LiabilityNew Deferred Tax Liability DTL=Sum of FV of Write-Upsx(buyer tax rate)Module 4- Business Combination & Accretion / Dilution AnalysisStep 1- Revenue SynergiesCalculate percentage increase based on the combined entity’s revenueLink revenue Synergies in Merger Model to Revenue Synergies ScheduleStep 2- COGS Associated with Revenue Synergies & COGS SynergiesCOGS Associated with Revenue Synergies:Calculate COGS Margin of Combined EntityCombined COGSCombined RevenuesCalculate Combined COGSCOGS Margin x Combined RevenueCOGS SynergiesLink to COGS Synergies in Synergies ScheduleImportant: Recall that COGS Synergies are in the form of improved marginsStep 3- Operating AdjustmentsOpEx SynergiesLink to OpEx Synergies in Synergies ScheduleImportant: Recall that OpEx Synergies are in the form of improved marginsAmortization of New Intangibles (Definite-Lived)Intangibles WriteUpIntangibles Ammortization PeriodDepreciation from PP&E Write-UpPP&E WriteUpDepreciation PeriodStep 4- Non-Operating AdjustmentsForegone Interest on Cash: The opportunity cost of using the cash to fund the transactionInterest on Cash x (Cash Used+Excess Cash Used)Interest Paid on New Debt Issued:Debt Issued x Interest Rate on New DebtAmortization of Financing Fees:Capitalized Financing FeesAmmortization PeriodStep 5- Ownership Splits AdjustmentsNew Shares Issued:Target Share Price x Equity Purchase PriceAcquirer Share PriceStep 6- Accretion / Dilution AnalysisCalculate Acquirer Standalone EPSNetIncomeTotal Diluted SharesCalculate Combined Entity EPSDiluted shares based on acquirers projected diluted sharesAccretion / Dilution CalculationChange in Dollar Value Combined Entity EPS-Aquirer Standalone EPSChange in % Basis Change in Dollar BasisAcquirer Standalone EPS ................
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