Major steps to conducting an M&A analysis

1. Obtaining a purchase price
2. Estimating sources and uses of funds
3. Creating a pro-forma analysis

Obtaining a purchase price

• The acquirer would need to consider a purchase based on the acquiree’s diluted shares, not basic ones.

Uses of funds

• Purchase price
• Net debt
• Transaction fees

Net debt (as opposed to Total debt)

• Public company: the acquirer must conduct due diligence on the acquiree’s debts; consider whether to pay down all the debts or to keep them on the BS.
• Private company: If the purchase price negotiated is EV or based on EBITDA multiple, then it includes debt => the acquirer shouldn’t have to raise additional funds to pay debts (seller’s obligation); On the other hand, if the purchase price is based on multiple of net income, the acquirer has to pay debts.

Transaction fees

• Investment Banking fees
• Legal fees
• Due Diligence costs
• Environmental Assessment
• HR
• Debt fees
• Equity fees

Sources of funds

• Raising equity or debt
• Using cash on hand

Creating a pro-forma analysis

• An accretion/dilution analysis is a way to assess the financial impact on the combined entities’ EPS.
• When applying, we simply add together everything from revenue down to net income, except for items relating to the acquiree’s Shareholders’ equity and net debt

Pro-forma transaction adjustments

• Postmerger cost savings: can assume a small % of OP or SG&A (0.5% to3%)
• Amortization of newly allocated intangible assets:
  • Goodwill
  • Step-up of Existing Assets
  • New intangible assets, the depreciation of which is based on rules
  • Deferred tax adjustments

In modeling, 20% to 25% of the purchase price above book value is often allocated toward intangible assets as a safe assumption.

• New interest expense
• New shares raised

 

Content source: Paul Pignataro. (2020) Mergers, Acquisitions, Divestitures, and Other Restructurings.