Mergers and Acquisitionsguide.docx
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Mergers and Acquisitionsguide.docx
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MergersandAcquisitionsguide
MergersandAcquisitions–Abeginner’sguide
Valuation
M&Ainvolvesusingmorethanonevaluationtechniquetoarriveatavaluationthatwethinkisfair.Themostcommontechniquesusedare:
ØComparablePubliclytradedcompanies(“PublicComps”)–thisanalysisindicateshowthestockmarketsarevaluingcompaniesthataresimilartothetarget
ØPrecedentComparableTransactionanalysis(“TransactionComps”)–thisanalysisindicatesthevaluationsatwhichpriorM&Atransactionshavebeendoneinthesameindustryasthatofthetarget.
ØDCFanalysis–isoneofthemostimportantvaluationtechniques
ØSum-of-the-partsanalysis–Ifatargethasmorethanonelinesofbusiness,thefinancialadvisorwillvalueeachbusinessseparately.Therefore,each“part”mighthaveitsownPublicComps,TransactioncompsandDCF(withdifferentWACCsforeachpart).Thetotalvalueisthesumoftheparts
ØOther–dependingontheuniquecharacteristicsofthetransaction,financialadvisorswillperformanumberofotheranalysestoarriveatfairvaluelikeLeveragedBuyout(“LBO”)Analysis,HistoricalExchangeRationanalysesetc.
PUBLICCOMPS
∙ComparethecurrenttradinglevelofaCompanytoitspeergroupofcompanies
∙Thepeergroupisasetof5to10companiesthataremostsimilartothetargetintermsofbusinessmixandstrategy,geographicrisks(samecountry),marginsandsize.(i.e.processedmeatsandrawmeatsaredifferent).
∙Tofindagoodpeergroupstartbroad(allcompaniesintheSICcode)andthennarrowthelisttothemostcomparablepeers.Alsorefertoequityresearchreports,industryreports,thecompany’s10KwhereitsdiscussescompetitorsandBloomberg(Quote2)toidentifythemostcomparablepeers.(lookatfiling8K,prospectuseswhentheydoafilingfornewdebtorequity–infreeedgar.)
∙
UnderstandwhyEquityvaluationandEnterprisevaluationaredifferent
ThegoaloftheanalysisistounderstandhowthemarketsisvaluingthepeergroupintermsofPricetoEarnings,PricetoBookvalue,PricetoCashflowtoEquity,WhatthePEGratiois,EnterpriseValuetoRevenues,EBITDA,NetAssetsetc.Alsounderstandifmergerpremiumisalreadybuiltintoprice–industrygroupshouldknowthis.
∙Therearealwayssomeindustryspecificcomps(Telecom–EnterpriseValuetoPOPsandSUBs,ElectricUtilities-$/Mwetc.).Makesureyoucapturetheseinyouranalysis.
∙Usingthese,wewilltrytovaluethetargetbearinginmindthatpubliccompsdon’treflectthe“controlpremium”thatanacquirerwillpayforbuyingcontrolofthetarget.Thecontrolpremiumisgenerallyaround30%forU.S.transactions.Also,somecompaniesthatarewidelyperceivedtobeacquisitiontargetsmayhavesomepremiumbuiltintotheirstockprice.
∙Mostcommonmultiplesare:
1.EquityMultiples:
P/E(Price/LTMEPS,Price/1-YearforwardEPS,NotethattheEarningsneedtobeafterPreferredDividendssothattheyareearningsthatareavailabletoCommonshareholders),PricetoBook(Price/Bookvalueofequitypershare).
2.EnterpriseValueMultiples:
EV/Revenues,EV/EBITDA,EV/EBIT(NotethattheRevenues,EBITDAandEBITmultiplescouldbecomputedforLTMand1-Yearforwardprojectednumbers)
TRANSACTIONCOMPS
∙Thegoalhereistounderstandthemultiplesatwhichtransactionsinthetarget’sindustrysectorhavebeenannouncedorcompleted.Theimportancedifferencewithpubliccompsisthatinthiscase,acontrolpremiumisbuiltintotheofferpriceandthereforethemultiples.
∙Specifically,determinethepricingofpastdealsascomparedtothetarget’sfinancialperformanceandunaffected(pre-announcement)marketvalue
∙Transactionsselectedshouldbeascomparabletoourproposedtransactionaspossible,sooneshouldlookforrecentdeals,whereacompanywithhighlysimilarbusinesswasacquired,inthesamecountryasthetargetetc.
∙Themostcommononesaresameasinthecaseofpubliccompsbut,additionally,transactioncompsalsocoverPremiumpaid(Offerpricepremiumas%of1-day,1-weekand4-weektradingprices).
DCF(Mergermodelhasthisalreadybuiltintoit)
∙Discountunleveragedprojectedfreecashflows(orinsomecasesdividendableincome)atCompany’scostofcapitaltoobtainaneconomicpresentvalueofassets.Subtractmarketvalueofoutstandingnetdebtandpreferredcapitalfromthepresentvalueofassetstogetpresentvalueofequity.Freecashflowisafter-taxoperatingearningsplusnon-cashchargeslessincreasesinworkingcapitallesscapitalexpenditures.(OnleveragedDCFanalysis,freecashflowisreducedbyafter-taxinterestexpense)
∙Sensitivitiesondiscountrates,terminalvalueassumptionsandoperatingscenariosarefrequentlyusedtoestimatetheuncertaintyinthevaluesobtained
LBO
∙Goalistounderstandhowmuchvalueafinancialbuyer(withnooperatingsynergies)couldbuythetargetfor
∙TounderstandtheeconomicsofanLBOletsdoanexample:
CompanyA’sequitymarketcapitalizationis$100MMandithasDebtof$75MM.ThisyearitreportedEBITDAof$50MM.Afinancialsponsorrealizesthattheevenifitboughtthestockata30%premiumtomarketfor$130MM,itcouldgenerateattractivereturns.So,thesponsorapproachesmanagementandstructureadealwherethefirmborrowsanadditional$100MMtobuybackstock.Thesponsorsuppliestheremaining$30MMrequiredtobuythepublicfloatandendsupowninga100%oftheequityofthefirm.Thenewfirmhas$75MMofoldand$100MMofnewdebtoutstandingwhichissustainedbythe$50MMofannualEBITDAandanequitycushionof$30MM.
∙TofinanceaLBO,therestructuredcompanyhastohaveaDebttoTotalCapitalization(Debt+Equity)notexceeding80%andaDebttoEBITDAratiothatdoesnotexceed5.0x.Notethatthesecouldvarybasedonthenatureoftheindustry.
∙Assumecurrentmarketscenariosforpricingthenewdebt
∙Theexitmechanismisanimportantelementsinceitdefineswhatthesponsorwilldoin,say,5yearstoexittheinvestment.Inotherwords,isthesponsorplanninganIPOorsaletostrategicplayers?
Thesponsor’sreturnswillbedrivenbyEBITDAgrowthrate,marginsimprovements,Capex,andexitmultiples
∙InaLBO,theentireequityisprivatelyheld,whileinaLeveragedRecapitalization,thereisusuallyasmallpercentageownedbypublicly.
SelectedPublicCompsstatisticsexplained
(1)Closingprice:
mostrecentclosingstockprice(fromBloomberg,ILXorPopulator).Pricesforallcompaniesshouldbeasofthesamedate.
(2)Equityvalue:
lastclosingstockpricemultipliedbynumberofsharesoutstanding.Sharesoutstandingfromfrontpageoflatest10K,10Q,orotherpublicdocumentadjustedforoptionsorotherinstrumentsinexistence(ifapplicable).Notedateofsharesoutstandingontheexhibit.Thefollowingisalistofdefinitionsofsharesoutstanding:
∙Basic:
Theactualoutstandingshareswhichcanbefoundonthecoverofthelatest10Qor10K.
∙Diluted:
ThisistheBasicsharesplusthedilutiveimpactofany“in-the-money”optionsorwarrantsthatareoutstandingascalculatedbytheTreasurystockadjustmentmethod.Lookforaveragestrikepriceandiflowerthanclosingpricethenassumewouldconvert.Lookatpubliccompstemplate.Optioninfoisin10K.
∙Fullydiluted:
Basic+Alloptionsandwarrants(asifallconvertedintoequity)
∙Average:
Thiscalculatestheaveragesharesthatwereoutstandingduringtheyearorquarter
(3)Firmvalue(orEnterpriseValue):
Equitymarketvalue+LTdebt+STdebt+preferredstock+MinorityInterest(-)cash.(Enterprisevaluemayvaluefromfirmtofirmorindustrytoindustry–sumoftotalvalueoffirm.Comesfromcashflowsofbusiness.)
∙Usenetincometocommonforcommonshareprice
∙UptoEBIT–stillenterprise#’s.Assoonasyoupayinterest–thenetincomebelongstoequityholders.
LTdebt:
fromlatest10K/QunderN/Cliabilities–LTdebtplusredeemablepfd.(Othertypesofpfd.stockarenotconsideredLTdebt.)
STdebt:
fromlatest10K/Qundercurrentliabilities–“STborrowings,”“banknotes,”“loans,”plus““accruedinterest”and“currentmaturitiesofLTdebt”(ifany)
Preferredstock:
fromlatest10K/Qunderstockholders’equity.Usemarketvalues,ifpossible,otherwisebookvalues.(MarketvaluecanfrequentlybeobtainedfromBloomberg.)
Cash:
fromlatest10K/Q–“cashandcashequivalents”plus“marketablesecurities”(ifany)
CommonFirmValuemultiplesare:
FV/Revenues,FV/EBITDA,FV/EBIT,FV/Cashflow,FV/Customersetc.WedoNOTcalculateFV/NetIncomeorFV/BookValuesincethedenominatorsinthese“belong”toequityholdersandsotheyareEquitymultiplesnotFirmvaluemultiples.
(4)Equityvaluemultiples:
WhiletheFirmvaluemultiplesreflecthowthebusinessisvalued,equitymultiplesreflecthowequitiesarevaluedrelativetothenetincomeorEPS(LTMandprojected)andBookvalue(latestavailable).
–DividetheLTMNIbytheweightedaveragenumberofsharesoutstandingfromthemostrecent10QtocalculateLTMEPS.(DonotuseLTMaverageshares!
)
–DividestockpricebyLTMEPS
ProjectedP/E:
GetmedianI/B/E/Sestimatesforthenexttwoyears.(AvailableonBloomberg,Infocenter,Insight,orPopulatorbyinputting=IDD(“ticker,”“FY1MEDIA”or“FY2MEDIA,”0).TheseestimatesarereportedonfullydilutedbasisandupdatedeveryThursday.AlwaysusemedianI/B/E/S(notmean)toavoidskeweddatavalues.Calendarizeearningsestimatesasneeded
Projectednetincomemultiple:
MultiplyforwardI/B/E/SbyI/B/E/Sprojectedweightedaveragesharesoutstanding(=IDD(“ticker,”“ibesshrs,”0)toobtainprojectednetincome.(NotethatI/B/E/SsharesarenotfullydilutedandaresourcefromExlelnot“street”anal
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