introduction to m&a -...

FINC 5670/6670/6676 ‐ Yost

Dr. Keven YostFINC 5670/6670/6676

Mergers and AcquisitionsCourse Packet

Spring 2018

Introduction to M&A

FINC 5670/6670/6676 ‐ Yost

M&A ACTIVITY

Introduction to M&A

MERGER WAVES

Wave #1: _________________

Economy and capital markets rebounding after depression

Rapid technological innovation

_____________ mergers

Mergers to build ______________ (or trusts)

Born: DuPont, GE

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Introduction to M&A

FINC 5670/6670/6676 ‐ Yost

MERGER WAVES

Wave #2: _________________

Following recession

_____________ mergers

Then…

MERGER WAVES

Wave #3: _________________

Conglomerate or _____________ mergers

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Introduction to M&A

FINC 5670/6670/6676 ‐ Yost

MERGER WAVES

Wave #4a: _________________

Breakup of conglomerates

___________ takeovers

___________

Increased involvement by foreign buyers

Featuring: RJR Nabisco MBO, Beecham Group buys SmithKline

MERGER WAVES

Wave #4b: _________________

Following recession

Strategic buyers looking for synergy

Featuring: AOL acquires Time Warner; Exxon buys Mobil

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Introduction to M&A

FINC 5670/6670/6676 ‐ Yost

MERGER WAVES

More recently: ________________

MERGER WAVES

Similarities:

____________________

____________________

____________________

Differences:

Industry focus

Type of transaction

Presence of hostile bids

Size of deals

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Introduction to M&A

FINC 5670/6670/6676 ‐ Yost

REASONS FOR M&A ACTIVITY

Managerial Hubris

Market Manias

Equity Valuation and Asymmetric Information

Agency Costs and Governance

Monopolistic/rent-seeking Behavior

Industry Shocks

Rational Markets Irrational Markets

Rational Managers

Irrational Managers

• Managerial Hubris

• Market Manias

• Equity Valuation and Asymmetric Information

• Agency Costs and Governance

• Industry Shocks

• Monopolistic/rent-seeking Behavior

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Introduction to M&A

FINC 5670/6670/6676 ‐ Yost

Does M&A Pay?

What is success?

Creating market valueFinancial stability Improved strategic positionOrganizational strengthEnhanced brand/reputationObserving the spirit of the law and ethics Improved process

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Introduction to M&A

FINC 5670/6670/6676 ‐ Yost

What does it mean to pay?

What is the goal of the firm?

What is the goal of M&A?

Net Present Value

What is the goal of the firm?

What is NPV?

What does it mean to have a zero NPV?

What does it mean to conserve value?

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Introduction to M&A

FINC 5670/6670/6676 ‐ Yost

What are we measuring?

Stock Price

Percent Return Relative to Benchmark

Percent Return Relative to No Transaction

How do we measure?

Event Studies

Accounting Studies

Surveys of Executives

Clinical Studies

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Introduction to M&A

FINC 5670/6670/6676 ‐ Yost

Statistical Significance

What do we do with a test statistic?

Statistical significance vs. economic significance

Annualized returns

The Evidence: Event Studies

Target firm shareholders:

Buyer firm shareholders:

The overall transaction:

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Introduction to M&A

FINC 5670/6670/6676 ‐ Yost

Does M&A Pay?

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Sell‐Side M&A

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Sell‐side M&ACHAPTER 6

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Sell‐Side M&A

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The Backward Order of this Course

Sell‐side M&ACHAPTER 6

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Sell‐Side M&A

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AuctionsPros Cons

AuctionsBroad Auction Targeted Auction

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Sell‐Side M&A

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Identify Seller Objectives and Determine Appropriate Sale Process

Perform Sell‐Side Advisor Due Diligence and Preliminary Valuation Analysis

Select Buyer Universe

Prepare Marketing Materials

Prepare Confidentiality Agreement

Identify Seller Objectives and Determine Appropriate Sale Process

Perform Sell‐Side Advisor Due Diligence and Preliminary Valuation Analysis

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Sell‐Side M&A

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Select Buyer Universe

Prepare Marketing Materials

____________________________

____________________________ (CIM)

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Sell‐Side M&A

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Prepare ____________________________

Use of information

Term

Permitted disclosures

Return of confidential information

Non‐solicitation/no hire

____________________________

Restrictions on clubbing

Contact Prospective Buyers

Negotiate and Execute Confidentiality Agreements with Interested Parties

Distribute Confidential Information Memorandum and Initial Bid Procedures Letter

•Price (range) and form of payment•Key assumptions•Structural considerations•Financing sources•Treatment of mgmt. & employees

•Timing for completion and diligence•Key conditions to closing•Required approvals•Buyer contact information

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Sell‐Side M&A

FINC 5670/6670/6676 ‐ Yost

Prepare Management Presentation

Set up ____________________________

Prepare Stapled Financing Package (if applicable)

Receive Initial Bids and Select Buyers to Proceed to Second Round

Conduct ____________________________

Facilitate Site Visits

Provide Data Room Access

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Sell‐Side M&A

FINC 5670/6670/6676 ‐ Yost

Due Diligence

Due Diligence is ___________.

Due diligence is part of __________________.

___________ vs. ___________scope trade‐off.

In what situations might a narrower scope of due diligence be justified?

Broad due diligenceNot just

◦ Risks ………………………………………….◦ The past and present ………………...◦ The firm ……………….…………………...◦ Financial condition ….…………………◦ Internal conditions …………………….◦ Basic data of the firm ………………...

But also

◦ ____________________________◦ ____________________________◦ ____________________________◦ ____________________________◦ ____________________________◦ ____________________________

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Sell‐Side M&A

FINC 5670/6670/6676 ‐ Yost

Distribute Final Bid Procedures Letter and Draft Definitive Agreement

Receive Final Bids

•Exact Price and form of payment•Draft Definitive Agreement•Evidence of committed financing•Attest to completed due diligence•Attest that the offer is binding

•Required approvals•Board approvals•Estimated time to sign and close•Buyer contact information

Evaluate Final Bids

Negotiate with Preferred Buyer(s)

Select Winning Bidder

Render ____________________________ (if required)

Receive Board Approval and Execute Definitive Agreement

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Sell‐Side M&A

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Obtain Necessary Approvals

_____________ Approval

Hart‐Scott‐Rodino Antitrust Improvements Act of 1976 (HSR Act)

Others?

_____________ Approval

Financing and Closing

Negotiated Sales● Pros Cons

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Buy‐Side M&A

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BUY-SIDE M&A Chapter 7

THE AGENDA

o Motivation to buy

o Acquisition Strategies

o Financing

o Deal Structure

o Valuation

o Merger Consequences Analysis

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Buy‐Side M&A

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WHY BUY?

o Less risky than ______________, or building from scratch

o Synergies

o ______________

o ______________

ACQUISITION STRATEGIES

o Horizontal

o Vertical

o ______________

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Buy‐Side M&A

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FINANCING

o Cash

o Debt

o Equity

WHICH IS BETTER FOR THE FIRM WHEN IT COMES TO…?Debt Equity

EPS Accretion

Cost of Capital

Tax Deductibility

Return on Equity

Balance Sheet Flexibility

No Required Payments

Credit Rating Health

Lack of Covenants

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Buy‐Side M&A

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DEAL STRUCTURE

o Stock Sale

o Goodwill

o Deferred Tax Liability

EXAMPLE: GOODWILL AND DTLYost Rocks, Inc. is a landscape supply company based in Boring, Oregon. It is acquiring, through a stock purchase, Baby Turf, LLC. Information is provided below. Calculate the deferred tax liability and goodwill created with this transaction.

Assumptions $ in millions (except per share)

Baby Turf Current Share Price $43.50

Premium Offered per Share 35.0%

Fully Diluted Shares Outstanding (Baby Turf) 80.0

Total Debt (Baby Turf) 1,500.0

Cash and Cash Equivalents (Baby Turf) 250.0

Net Identifiable Assets (Baby Turf) 2,500.0

Allocation of Purchase Price Premium to Tangible Assets 15.0%

Allocation of Purchase Price Premium to Intangible Assets 10.0%

Yost Rocks, Inc. Marginal Tax Rate 38.0%

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Buy‐Side M&A

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DEAL STRUCTURE

o Asset Sale

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Buy‐Side M&A

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EXAMPLE: ASSET SALE AND TAXESAssumptions

Purchase Price = $2 billion Amortization Period = 15 years

Asset Basis = $500 million Marginal Tax Rate = 38%

Discount Rate = 10% Capital Gains Rate = 15%

Seller

Stock Sale Asset Sale

Purchase Price

Asset Base

Capital Gain

Corporate Taxes

Gain to Shareholders

Personal Taxes

Net Proceeds

Buyer

Purchase Price

Tax Benefits

Net Purchase Price

DEAL STRUCTURE

o Stock Deals Treated as Asset Deals for Tax Purposes

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Buy‐Side M&A

FINC 5670/6670/6676 ‐ Yost

WHICH IS LIKELY?Stock Sale Asset Sale 338(h)(10) Election

Shareholders are Sellers

Corporate Entity is Seller

Double Taxation Potential

Seller Transfers All Assets & Liabilities

Execution Simplicity

Asset Step-up for Accounting Purposes

Asset Step-up for Tax Purposes

Common for Large Public Companies

Common for Subsidiary Sales

VALUATON

o The Football Field

o Analysis at Various Prices (AVP) or Valuation Matrix

o Contribution Analysis

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Buy‐Side M&A

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Company A Preliminary Valuation

DCF range is derived using 8.5% - 9.5% WACC and 1.5% - 2.5% Perpetuity Growth Rate, assuming 5.0% Sales Growth and 10% EBITDA Growth

Entry Multiple range; 11.5x – 12.5x

Exit Multiple of 12.0x

Target IRR of 20% - 25%

Range of 11.0x – 13.0x


$1,898

$2,320

$2,426

$2,302

$2,531

$2,742

$2,636

$3,034

$1,500 $1,700 $1,900 $2,100 $2,300 $2,500 $2,700 $2,900 $3,100

Methodology Implied Enterprise Value (1) Key Assumptions

Discounted Cash Flow Analysis

Leveraged Buyout Analysis

Selected Precedent Transactions Analysis

Trading Comparables Analysis

(1) Enterprise Value based on 2014E LTM Adjusted EBITDA of $211 million (XXXXXXXXXXXXXXXXX)

6

BALANCE SHEET EFFECTS

o Determine Price and Payment

o Asset Write-ups

o The Impact of Goodwill

o Deferred Tax Liability

o The Impact on Credit

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Buy‐Side M&A

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INCOME STATEMENT EFFECTS

o The Impact of Asset Write-ups

o The Impact on EPS

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Comparable Companies Analysis

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Comparable Companies

AnalysisChapter 1

Trading Comps

■ How They Work

■ Pros and Cons

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The Process

■ Step 1: Select the Universe of Comparable Companies

■ Step 2: Locate the Necessary Financial Information

■ Step 3: Spread the Key Statistics, Ratios, and Trading Multiples

■ Step 4: Benchmark the Comparable Companies

■ Step 5: Determine Valuation

Select the Universe of Comparable Companies

■ Study the Target

■ Identify Key Characteristics

■ Screen for Comparable Companies

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Business Profile

■ Sector

■ SIC Code = 2082 - Malt Beverages

■ NAICS = 312120 – Breweries

■ Others (BICS, S&P, etc.)

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Business Profile

■ Sector

■ Products and Services

■ Customers and End Markets

■ Distribution Channels

■ Geography

Financial Profile

■ Size

■ Profitability

■ Growth Profile

■ Return

■ Credit Profile

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Select the Universe of Comparable Companies

■ Study the Target

■ Identify Key Characteristics

■ Screen for Comparable Companies

The Process

Step 1: Select the Universe of Comparable Companies

Step 2: Locate the Necessary Financial Information

■ Step 3: Spread the Key Statistics, Ratios, and Trading Multiples



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SEC Filings

■ 10-K

■ 10-Q

■ 8-K

■ Schedule 14A

■ EDGAR (www.sec.gov)

Other Sources of Information■ Equity Research Reports

■ Consensus Estimates

■ Press Releases and News

■ Financial Information Services– Bloomberg– FactSet– Moody’s, S&P, Value Line

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The Process



Step 3: Spread the Key Statistics, Ratios, and Trading Multiples



Calculating Value: Equity Value

■ How do we do it?

■ What is fully diluted shares outstanding?

■ How do we calculate it?– Treasury Stock Method– If-Converted Method– Net Share Settlement

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FINC 5670/6670/6676 ‐ Yost

Treasury Stock Method –Options and Warrants

Assumptions

Current Share Price $40.00

Basic Shares Outstanding 300.0

Exercisable Options 10.0

Weighted Average Exercise Price $26.00

($ in millions, except per share data; shares in millions) Calculation of Fully Diluted Shares Using the TSM

Option Proceeds

Current Share Price

Shares Repurchased form Option Proceeds

Shares from In-the-Money Options

Less: Shares Repurchased from Option Proceeds

Net New Shares from Options

Plus: Basic Shares Outstanding

Fully Diluted Shares Outstanding

Treasury Stock Method –Options and Warrants : Another Example

Assumptions



Exercisable Options 5.0

Weighted Average Exercise Price $18.00

($ in millions, except per share data; shares in millions)

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If-Converted Method–Convertible Debt

Assumptions

Company



Convertible Security

Amount Outstanding $150.0

Conversion Price $15.00

($ in millions, except per share data; shares in millions) Calculation Using the If-Converted Method

Amount Outstanding

Conversion Price

Incremental Shares

Basic Shares Outstanding

Plus: Net New Shares from Options

Plus: Incremental Shares from Convertibles

Fully Diluted Shares Outstanding

Net Share Settlement Method–Convertible Debt

Assumptions

Company



Convertible Security

Amount Outstanding $150.0

Conversion Price $15.00

($ in millions, except per share data; shares in millions) Calculation Using the Net Share Settlement Method

Amount Outstanding

Conversion Price

Total Incremental Shares

X Current Share Price

Total Conversion Value

Less: Par Value of Amount Outstanding

Excess Over Par

Current Share Price

Incremental Shares Using NSS

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Calculating Value: Enterprise Value

■ Size

■ Profitability

■ Growth Profile

■ Return

■ Credit Profile

Financial Profile

■ Size

■ Sales

■ Gross Profit

■ EBITDA

■ EBIT

■ Net Income

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■ Size

■ Profitability

Financial Profile■ Gross Profit Margin

■ EBITDA and EBIT Margin

■ Net Income (Profit) Margin

■ Size

■ Profitability

■ Growth Profile

■ Return

Financial Profile■ Return on Invested Capital

■ Return on Equity

■ Return on Assets

■ Dividend Yield

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■ Size

■ Profitability

■ Growth Profile

■ Return

■ Credit Profile

Financial Profile■ Leverage Ratio

■ Capitalization Ratio

■ Interest Coverage Ratio

Adjusting Financials:Calculating LTM Data

= + –The Walt Disney Company

Q112/31/16

Q23/31/17

Q36/30/17

Q49/30/17

Q112/31/17

Prior Fiscal Year

Plus: Current Stub

Less: Prior Stub

LTM

■ LTM = Prior Fiscal Year + Current Stub – Prior Stub

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Data for this slide not available when course packet was prepared.

The Walt Disney Company

Q112/31/16

Q23/31/17

Q36/30/17

Q49/30/17

Q112/31/17

Prior Fiscal Year

Plus: Current Stub

Less: Prior Stub

LTM

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Adjusting Financials:Calendarization of Data

Adjusting Financials:Non-recurring Items and Recent Events

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■ Equity Value Multiples

■ Enterprise Value Multiples

■ Sector-specific Multiples

Calculate Trading Multiples■ Price-to-Earnings Ratio

■ Equity Value-to-Net Income Multiple




Calculate Trading Multiples■ Enterprise Value-to-EBITDA

■ Enterprise Value-to-EBIT

■ Enterprise Value-to-Sales

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The Process




Step 4: Benchmark the Comparable Companies


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FINC 5670/6670/6676 ‐ Yost

The Process




Step 4: Benchmark the Comparable Companies

Step 5: Determine Valuation

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Pros■ __________________

■ __________________

■ __________________

■ __________________

Cons■ _____________________________

■ _____________________________

■ _____________________________

■ _____________________________

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Precedent Transactions Analysis

FINC 5670/6670/6676 ‐ Yost

PRECEDENT TRANSACTIONS ANALYSISChapter 2

THE PROCESSStep 1: Select the Universe of Comparable Acquisitions

Step 2: Locate the Necessary Deal-related and Financial Information

Step 3: Spread the Key Statistics, Ratios, and Transaction Multiples

Step 4: Benchmark the Comparable Acquisitions


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SELECT THE UNIVERSE OF COMPARABLE ACQUISITIONS

Screen for Comparable Acquisitions

Examine Other Characteristics

OTHER CHARACTERISTICS

Market ConditionsDeal DynamicsStrategic buyer vs. financial sponsor?Motivation for the sale?Sale process and nature of the deal?Purchase consideration?

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FILINGSProxy Statement (Schedule 14A)Schedule TO/Schedule 14D-9Registration Statement/Prospectus (S-4, 424B)Schedule 13E-38-K10K and 10QEquity and Fixed Income Research Reports

What about private targets?






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CALCULATING VALUE: EQUITY VALUE

What is different from comparable companies analysis?

PURCHASE CONSIDERATION

All-cash Transaction

Stock-for-stock TransactionFixed Exchange RatioFloating Exchange Ratio

Cash/stock Mix Transaction

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Stock-for-stock TransactionFixed Exchange Ratio

Floating Exchange Ratio


Cash/stock Mix Transaction

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CALCULATING VALUE: ENTERPRISE VALUE

What is different from comparable companies analysis?




CALCULATE TRANSACTION MULTIPLES

■ Price-to-Earnings Ratio

■ Equity Value-to-Net Income Multiple

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■ Enterprise Value-to-EBITDA

■ Enterprise Value-to-EBIT

■ Enterprise Value-to-Sales


Premiums Paid

Synergies

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PRECEDENT TRANSACTIONS ANALYSISPros____________________

____________________

____________________

____________________

____________________

Cons________________________________

________________________________

________________________________

________________________________

________________________________

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Discounted Cash Flow AnalysisChapter 3

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The Process

•Step 1: Study the Target and Determine Key Performance Drivers

•Step 2: Project Free Cash Flow

•Step 3: Calculate Weighted Average Cost of Capital

•Step 4: Determine Terminal Value

•Step 5: Calculate Present Value and Determine Valuation

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Study the Target and Determine Key Performance Drivers

•Know the target

•Key drivers

Calculating Free Cash Flow

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Projections

•Sales

•COGS

•SG&A Expenses

•EBITDA or EBIT

Projections

•Taxes

•Depreciation and Amortization

•Capital Expenditures

•Changes in Net Working Capital

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Net Working Capital

•What?

•Why?

Net Working Capital

•Accounts Receivable• Days Sales Outstanding (DSO) =

• Inventory• Days Inventory Held (DIH) = • Inventory Turnover =

•Other Current Assets

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Net Working Capital

•Accounts Payable• Days Payable Outstanding (DPO) =

•Other Current Liabilities

Calculating WACC

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Calculating the Cost of Equity

•The CAPM

Terminal Value

•Exit Multiple Method• Terminal Value =

•Perpetuity Growth Method• Terminal Value =

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Checking the Consistency

•EMM PGM

Checking the Consistency

•PGM EMM

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Valuation

•Mid-year Convention

•Enterprise Value

• Implied Equity Value

• Implied Share Price


Pros• __________________

• __________________

• __________________

• __________________

Cons• ____________________________

• ____________________________

• ____________________________

• ____________________________

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Review for Exam #2

FINC 5670/6670/6676 ‐ Yost

Review for Exam #2

The Big Picture

About M&A• Sell-side M&A• Buy-side M&A

Valuation• Comparable Companies• Precedent Transactions• Discounted Cash Flow• LBO

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Review for Exam #2

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Exam #2 Format and Content

Comparable Companies• How to estimate value with multiples

• How to select comparable companies

• Where to find information

• Full diluted shares outstanding (TSM/If-converted, NSS)

• Equity value and enterprise value

• Spreading the statistics (size, profitability, return, credit)

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Review for Exam #2

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Comparable Companies – cont.• Fiscal year vs. LTM

• Calendarization

• Normalization (non-recurring items)

• Calculate trading multiples (equity, EV)

Pros and cons

Precedent Transactions• How to select comparable acquisitions

• Where to find information

• Purchase consideration (cash, stock-for-stock)

• Fixed and floating exchange ratios

• Calculate transaction multiples (equity, EV)

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Review for Exam #2

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Precedent Transactions – cont.• Premiums paid

• Synergies

• Pros and cons

Discounted Cash Flow• What is free cash flow

• Projecting free cash flow (and its components)

• Calculating WACC

• The CAPM

• Levered and Unlevered Betas

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Review for Exam #2

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Discounted Cash Flow – cont.• Terminal value (EMM and PGM)

• Discounting (end-of-year, mid-year)

• Pros and cons

Discounting Example1 2 3 4 5

$100 $200 $300 $400 $500

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Leveraged Buyouts

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Leveraged BuyoutsChapter 4

LBOs: The Agenda• Participants

• Characteristics of a Strong LBO Candidate

• Economics of LBOs

• Primary Exit/Monetization Strategies

• Financing

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Leveraged Buyouts

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LBO Participants• Financial Sponsors

• Investment Banks

• Bank and Institutional Lenders

• Bond Investors

• Target Management

Strong LBO Candidate Have…• Strong cash flow generation

• Strong market positions

• Strong growth opportunities

• Strong opportunities to enhance efficiency

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Leveraged Buyouts

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Strong LBO Candidate Have…• Low capex requirements

• Strong asset bases

• Strong management teams

continued

Economics of LBOs• How LBOs generate returns• How to measure returns

• IRR

• Cash return

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Leveraged Buyouts

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Primary Exit/Monetization Strategies• Sell it

• Take it public

• Recapitalize

• Distressed debt repurchase

Financing Structure

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Leveraged Buyouts

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Financing Structure

Financing Terminology• Security

• Seniority• Structural vs. Contractual

• Maturity

• Coupon

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Leveraged Buyouts

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Financing Terminology• Call Provisions

• Covenants

• Term Sheets

continued

Financing Sources• Bank Debt

• Revolving Credit Facility

• Asset-based Lending (ABL) Facility

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Leveraged Buyouts

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Financing Sources• Term Loan Facility

• Amortizing Term Loan

• Institutional Term Loan

• Second Lien Term Loan

continued

Financing Sources• High Yield Bonds

• Bridge Loans

• Mezzanine Debt

• Equity

continued

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Leveraged Buyouts

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Determining Optimal Structure

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LBO Analysis

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LBO ANALYSISCHAPTER 5

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LBO Analysis

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THE PROCESS

• STEP 1: LOCATE AND ANALYZE THE NECESSARYINFORMATION

• STEP 2: BUILD THE PRE-LBO MODEL

• STEP 3: INPUT TRANSACTION STRUCTURE

• STEP 4: COMPLETE THE POST-LBO MODEL

• STEP 5: PERFORM THE LBO ANALYSIS

STEP 2: BUILD THE PRE-LBO MODEL

A. BUILD HISTORICAL AND PROJECTEDINCOME STATEMENT THROUGH EBIT

B. INPUT OPENING AND PROJECTEDBALANCE SHEET ITEMS

C. BUILD CASH FLOW STATEMENT THROUGHINVESTING ACTIVITIES

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LBO Analysis

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BUILD HISTORICAL AND PROJECTED INCOME STATEMENT THROUGH EBIT

A.

INPUT OPENING AND PROJECTED BALANCE SHEET ITEMS

B.

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LBO Analysis

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BUILD CASH FLOW STATEMENT THROUGH INVESTING ACTIVITIES

C.

STEP 3: INPUT TRANSACTION STRUCTURE

A. ENTER PURCHASE PRICE ASSUMPTIONS

B. ENTER FINANCING STRUCTURE INTOSOURCES AND USES

C. LINK SOURCES AND USES TO BALANCE SHEETADJUSTMENT COLUMNS

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LBO Analysis

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ENTER PURCHASE PRICE ASSUMPTIONSA.

ENTER FINANCING STRUCTURE INTO SOURCES AND USES

B.

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LBO Analysis

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LINK SOURCES AND USES TO BALANCE SHEET ADJUSTMENT COLUMNS

C.

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LBO Analysis

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STEP 4: COMPLETE THE POST-LBO MODEL

A. BUILD DEBT SCHEDULE

B. COMPLETE PRO FORMA INCOME STATEMENTFROM EBIT TO NET INCOME

C. COMPLETE PRO FORMA BALANCE SHEET

D. COMPLETE PRO FORMA CASH FLOW STATEMENT

BUILD DEBT SCHEDULEA.

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LBO Analysis

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COMPLETE PRO FORMA INCOME STATEMENT FROM EBIT TO NET INCOME

B.

COMPLETE PRO FORMA BALANCE SHEETC.

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LBO Analysis

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COMPLETE PRO FORMA CASH FLOW STATEMENT

D.

STEP 5: PERFORM THE LBO ANALYSIS

A. ANALYZE FINANCING STRUCTURE

B. PERFORM RETURNS ANALYSIS

C. DETERMINE VALUATION

D. CREATE TRANSACTION SUMMARY PAGE

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ANALYZE FINANCING STRUCTUREA.

PERFORM RETURNS ANALYSISB.

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LBO Analysis

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DETERMINE VALUATIONC.

DCF range is derived using 8.5% - 9.5% WACC and 1.5% - 2.5% Perpetuity Growth Rate, assuming 5.0% Sales Growth and 10% EBITDA Growth

Entry Multiple range; 11.5x – 12.5x

Exit Multiple of 12.0x

Target IRR of 20% - 25%



$1,898

$2,320

$2,426

$2,302

$2,531

$2,742

$2,636

$3,034

$1,500 $1,700 $1,900 $2,100 $2,300 $2,500 $2,700 $2,900 $3,100

Methodology Implied Enterprise Value (1) Key Assumptions


Leveraged Buyout Analysis

Selected Precedent Transactions Analysis

Trading Comparables Analysis

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LBO Analysis

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CREATE TRANSACTION SUMMARY PAGE

D.

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Review for Final Exam

FINC 5670/6670/6676 ‐ Yost


Grades• Undergraduate:

• 25% Exam #1 + 25% Exam #2 + 25% Final Exam + 25% Cases/Assignments

• Graduate:• 25% Exam #1 + 25% Exam #2 + 25% Final Exam

+ 15% Cases/Assignments + 10% Project/Presentation

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FINC 5670/6670/6676 ‐ Yost

When?• On-campus:

• ________________________________________

• Online:• ________________________________________

The Big Picture



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Final Exam

LBOs• Participants

• Characteristics of a Strong LBO Candidate

• Economics of LBOs

• Primary Exit/Monetization Strategies

• Financing

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LBO Analysis• Locate and Analyze the Necessary Information

• Build the Pre-LBO Model

• Input Transaction Structure

• Complete the Post-LBO Model

• Perform the LBO Analysis

LBO Analysis• Balance sheet, income statement, statement of cash flows

• Basic construction and how they interact

• Sources and uses of funds

• Debt schedule

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Old Stuff

The Big Picture



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Old Stuff• Calculate net proceeds from asset and stock sales

• Calculate DTL

• Calculate fully diluted shares outstanding

• Calculate DCF and WACC

• Calculate enterprise value and equity value

Old Stuff• Pros and cons of valuation methods

• Which valuation methods are higher/lower? Why?

• Pros and cons of sell-side methods

• Exchange ratios

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