J.P. Morgan M&A Reference Manual
Copyright © 1997 Morgan Guaranty Trust Company of New York. All rights reserved. June 1998 82890cl6
J.P. Morgan M&A Reference Manual
This “M&A bible” is meant to serve as a training guide for newcomers to M&A, as well as a technical reference manual for experienced (and not so experienced) M&A practitioners. It incorporates what a number of people in M&A believe to beessential or useful basic knowledge to perform the tasks required in the daily routine of the strategic advisory business. As the financial, legal and tax environment in which the M&AGroup operates is forever changing, periodic updates of this publication are intended. As such, any suggestions for improvement would be appreciated. Please direct your comments for improvement, but not your requests for copies of the book, to Eileen Smith at (77)6-8305. An online version of the book isavailable to Investment Banking professionals on the IB M&A Research database in Lotus Notes or through IB Today.The book is confidential, proprietary and the sole property of J.P. Morgan and should not be passed along to colleagues outside of Investment Banking or to people at competitor firms.
J.P. Morgan M&A Reference Manual
Copyright © 1997 Morgan Guaranty Trust Company of New York. All rights reserved. June 1998 82890cl6
Contents
Valuation methodologies overview ............................................................... 1
Advantages and disadvantages ........................................................................ 1
Comparable company trading analysis ....................................................... 6
Selected trading statistics explained ................................................................ 8Selected operating statistics explained ............................................................. 13Typical data problems ...................................................................................... 17Summary of inputs and outputs ....................................................................... 18
Comparable transactions analysis ................................................................ 20Discounted Cash Flow (“DCF”) ................................................................... 23
Free Cash Flow (“FCF”) .................................................................................. 24End-period convention ..................................................................................... 28Mid-period convention (J.P. Morgan standard) ............................................... 29Terminal value: two methods of forecasting.................................................... 31Weighted average cost of capital (“WACC”) .................................................. 35Mechanics of discounting cash flows .............................................................. 38
Investing in, acquiring or merging with another company ........................ 40
Overview .......................................................................................................... 40Cost method ..................................................................................................... 43Fair value method ............................................................................................ 43Equity method .................................................................................................. 44Purchase method .............................................................................................. 48Pooling method ................................................................................................ 53Other accounting methods for business combinations ..................................... 56NB: These areas of accounting are highly technical. Consult withteam members regarding implementation. ....................................................... 56
M&A tax issues and considerations ............................................................. 57
I. Terminology ................................................................................................. 57II. The five key tax questions to answer in most M&Atransactions ...................................................................................................... 58III. Joint ventures ............................................................................................. 80IV. Diagrams of selected M&A transaction structures .................................... 83
J.P. Morgan M&A Reference Manual
Copyright © 1997 Morgan Guaranty Trust Company of New York. All rights reserved. June 1998 82890cl6
Legal Aspects of Mergers and Acquisitions in the UnitedStates ............................................................................................................... 87
I. Basic forms of acquisitions........................................................................... 87II. The Acquisition Agreement ........................................................................ 88III. Timing ........................................................................................................ 89IV. Acquisition of Stock Through Open Market or NegotiatedPurchases ......................................................................................................... 90V. Acquisition of Stock Through Tender Offers ............................................. 91VI. Takeover Defenses .................................................................................... 93VII. State Antitakeover Statutes ...................................................................... 96
Other analyses and selected J.P. Morgan M&A standardexhibits ............................................................................................................ 97
Company “one pager” ...................................................................................... 97Break-up valuation ........................................................................................... 103EPS calculations .............................................................................................. 106Analysis of shareholdings ................................................................................ 116Analyst coverage analysis ................................................................................ 118Company management profiles ....................................................................... 119
Appendices
Appendix A: Proofreading marks ................................................................... 122Appendix B: Using the HP-12C ..................................................................... 123Appendix C: Referring to J.P. Morgan ........................................................... 127Appendix D: Basic typesetting, formatting and color guidelines ................... 130Appendix E: Bond ratings ............................................................................... 135Appendix F: J.P. Morgan M&A financial definitions .................................... 136Appendix G: JPM credit ratio guidelines and definitions ............................... 139
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