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JPMorgan M&a Bible

JPMorgan M&a Bible

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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 be
essential 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&A
Group 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 is
available 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 ................................................................ 8
Selected operating statistics explained ............................................................. 13
Typical data problems ...................................................................................... 17
Summary of inputs and outputs ....................................................................... 18

Comparable transactions analysis ................................................................ 20

Discounted Cash Flow (“DCF”) ................................................................... 23

Free Cash Flow (“FCF”) .................................................................................. 24
End-period convention ..................................................................................... 28
Mid-period convention (J.P. Morgan standard) ............................................... 29
Terminal value: two methods of forecasting.................................................... 31
Weighted average cost of capital (“WACC”) .................................................. 35
Mechanics of discounting cash flows .............................................................. 38

Investing in, acquiring or merging with another company ........................ 40

Overview .......................................................................................................... 40
Cost method ..................................................................................................... 43
Fair value method ............................................................................................ 43
Equity method .................................................................................................. 44
Purchase method .............................................................................................. 48
Pooling method ................................................................................................ 53
Other accounting methods for business combinations ..................................... 56
NB: These areas of accounting are highly technical. Consult with
team members regarding implementation. ....................................................... 56

M&A tax issues and considerations ............................................................. 57

I. Terminology ................................................................................................. 57
II. The five key tax questions to answer in most M&A
transactions ...................................................................................................... 58
III. Joint ventures ............................................................................................. 80
IV. 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 United
States ............................................................................................................... 87

I. Basic forms of acquisitions........................................................................... 87
II. The Acquisition Agreement ........................................................................ 88
III. Timing ........................................................................................................ 89
IV. Acquisition of Stock Through Open Market or Negotiated
Purchases ......................................................................................................... 90
V. Acquisition of Stock Through Tender Offers ............................................. 91
VI. Takeover Defenses .................................................................................... 93
VII. State Antitakeover Statutes ...................................................................... 96

Other analyses and selected J.P. Morgan M&A standard
exhibits ............................................................................................................ 97

Company “one pager” ...................................................................................... 97
Break-up valuation ........................................................................................... 103
EPS calculations .............................................................................................. 106
Analysis of shareholdings ................................................................................ 116
Analyst coverage analysis ................................................................................ 118
Company management profiles ....................................................................... 119

Appendices

Appendix A: Proofreading marks ................................................................... 122

Appendix B: Using the HP-12C ..................................................................... 123

Appendix C: Referring to J.P. Morgan ........................................................... 127

Appendix D: Basic typesetting, formatting and color guidelines ................... 130

Appendix E: Bond ratings ............................................................................... 135

Appendix F: J.P. Morgan M&A financial definitions .................................... 136

Appendix G: JPM credit ratio guidelines and definitions ............................... 139

J.P. Morgan M&A Reference Manual

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

June 1998 82890cl6

Exhibits

Exhibit: Selected trading statistics .................................................................. 7

Exhibit: Selected determinants of EBIT and EBITDA multiples ................... 11

Exhibit: Selected operating statistics .............................................................. 12

Exhibit: Selected credit and operating statistics ............................................. 12

Exhibit: CAGR analysis .................................................................................. 16

Exhibit: Inputs to the comparables ................................................................. 18

Exhibit: Outputs to the comparables ............................................................... 19

Exhibit: Premiums and multiples paid on comparable transactions
......................................................................................................................... 22

Exhibit: Calculating free cash flows and the effect of leverage ..................... 25

Exhibit: Calculating net working investment ................................................. 26

Exhibit: Mid-period versus end-period convention illustrated ....................... 28

Exhibit: DCF assuming end-period convention .............................................. 29

Exhibit: DCF assuming mid-period convention ............................................. 29

Exhibit: Discounting mid-period cash flows .................................................. 30

Exhibit: Weighted average cost of capital analysis ........................................ 37

Exhibit: Decision tree for accounting for investments in voting
equity securities and assets ............................................................................. 41

Exhibit: Effects of various methods of accounting for long-term
investments in equity securities ...................................................................... 42

Exhibit: Purchase accounting – fair value method ........................................ 44

J.P. Morgan M&A Reference Manual

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

June 1998 82890cl6

Exhibit: SEC recommendations regarding amortization periods .................... 46

Exhibit: Purchase accounting – equity method ............................................... 47

Exhibit: Purchase accounting .......................................................................... 52

Exhibit: The 12 requirements for a pooling of interest ................................... 54

Exhibit: Accretion/dilution analysis – pro forma net income
reconciliation .................................................................................................. 55

Exhibit: Quantitative assessments of divestiture alternatives ......................... 56

Exhibit: Company “one pager” ....................................................................... 98

Exhibit: Comparison of APB Opinion No. 15 (old methodology)
and FASB 128 (new methodology) ................................................................ 114

Exhibit: Comparison of aspects of APB opinion no. 15 and FASB
statement no. 128 ............................................................................................ 115

Exhibit: Analysis of shareholdings ................................................................. 117

Exhibit: Research analysts’ commentary ........................................................ 118

Exhibit: Profile of insiders, directors, and officers ......................................... 119

Exhibit: Defensive profile – provides essential information
regarding a company’s vulnerability to hostile approach ............................... 120

Exhibit: Trade-weighted volume analysis – provides insight into
current shareholder’s basis in target stock ...................................................... 121

Exhibit A I: Proofreading marks ..................................................................... 122

Exhibit C I: J.P. Morgan subsidiary identification ......................................... 129

Exhibit D I: Use of color ................................................................................. 132

Exhibit D II: Use of black and white tints ...................................................... 133

J.P. Morgan M&A Reference Manual

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

June 1998 82890cl6

Exhibit: J.P. Morgan M&A financial definitions ............................................ 136

Exhibit: J.P. Morgan M&A financial definitions (cont’d) .............................. 137

Exhibit: J.P. Morgan M&A financial ratios .................................................... 138

J.P. Morgan M&A Reference Manual

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

82890cl6

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