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JPMorgan M&a Bible

JPMorgan M&a Bible

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Published by: wallstreetprep on Jan 31, 2012
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A break-up valuation reflects the value of a company’s equity by summing the value
of its individual segments on a standalone basis to arrive at the total asset value, and
then making corporate adjustments to determine the net asset (or equity) value. In
essence, the break-up analysis looks at a company from the perspective of a raider
who would finance an acquisition by “breaking-up” the company (i.e., selling off
each operating segment)


One page exhibit with both values and comments on a single page

Summary sheet of values; back-up sheet of footnotes and computations

The exhibit typically consists of the following items:


Each company segment valued independently; valuation method used depends
largely on the type of company and the available information. Discounted
cash flow valuation and analysis of multiples are de rigueur. Confer with a
team member to choose the most appropriate valuation technique. Be sure to
footnote the chosen method(s)

Cash and cash equivalents

Include any excess cash (cash deemed unnecessary to operate the business)
plus marketable securities

Pension surplus

There are two types of pension plans:

Defined contribution plan

Fixed amount of contribution (i.e., employer sets aside a specific
percentage of each employees – can’t discriminate in favor of certain
employees – annual salary); risk shifted to employees, as money must
be invested. Accounting impact: company records pension expense
each year as pension is funded.

Defined benefit plan

Company sets aside money based on actuarial estimates to ensure that
employees will receive a specified pension for life upon retirement;
investment risk rests with company as portfolio performance
determines future contributions. Actuarial analysis typically includes
worker life expectancy, retirement ages, future salaries, rates of return.
Accounting impact: complexities arise due to under- or over-funded

J.P. Morgan M&A Reference Manual


Copyright © 1997 Morgan Guaranty Trust Company of New York. All rights reserved.n


Defined benefit plans (not defined contribution plans) require surplus/deficit


Underfunded pension

As of 1989, underfunded pension liabilities are recorded on the
balance sheet (prior to 1989, reported as contingent liability in
footnotes); no reduction in book equity to offset the pension liability,
rather a corresponding asset.

Overfunded pension

Only shown in footnotes, never as an asset; excess cash creates
“opportunity” for company or potential raider to disband pension plan
to free up excess cash; (access as a legal matter is more complex)

NB: excise tax rate is currently 10% for pension terminations.

The after-tax pension surplus is calculated as follows:

Pension surplus


Total pension

Benefit Obligation (“ABO”)

Pension surplus


Pension surplus

x 1 –

Excise Tax Rate +
Marginal Tax Rate

NB: The ABO represents the amount actually owed to employees for
past services whereas the PBO (Projected Benefit Obligation) is an
estimate of past and future benefits owed to employees. In a break-up
scenario, the ABO is used because the selling company should not be
responsible for future liabilities

In the event that the calculation yields a negative number, the exhibit
entry would be called “Pension Deficit” and the value would be
subtracted from the total assets
List the date of the financial statement used in calculating the pension


Other assets

i.e., corporate real estate (as opposed to PP&E used by operating divisions),
advances to affiliates and equity investments in unconsolidated subsidiaries. If

J.P. Morgan M&A Reference Manual


Copyright © 1997 Morgan Guaranty Trust Company of New York. All rights reserved.n


the market value of these assets is known, then use that number, otherwise use
the book value from the most recent balance sheet (footnote the date)

Short-term debt: from most recent balance sheet

Long-term debt: from most recent balance sheet

Preferred stock: from most recent balance sheet

Minority interest: from most recent balance sheet

Equity value (or net asset value)

Total of segment valuations, cash, option proceeds, pension surplus, other assets,
STD, LTD, Pfd. stock, minority interest. The result is the break-up value of the

Market value

Add the number of shares outstanding from the most recent financials and the
number of options assumed to have been exercised to determine total shares
outstanding. Footnote the date of this value
Multiply this by a recent closing stock price. Note this date also


List the number of shares used to calculate the per share numbers. Make sure
this number includes the options which are assumed to have been exercised
(i.e., the number of shares used to calculate option proceeds should be added to
the number of shares outstanding to maintain consistency)

J.P. Morgan M&A Reference Manual


Copyright © 1997 Morgan Guaranty Trust Company of New York. All rights reserved.n


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