KIMBEARLY CHENG, MBA

Presenter

MERGERS AND
ACQUISITIONS
M&A
FINANCING
Equity Financing
Debt Financing
Mixed FInancing
M&A FINANCING
Involves raising funds to finance M&A
transactions. Companies may use equity
financing, debt financing, or a mix of the two.
Needs to be sensitive towards the operating cash
flows of the combined company.
Companies incur transaction fees when raising
capital. Transaction fees are a use of funds and
need to be considered as part of the total cost of
the deal.
A key consideration in M&A financing is to ensure
the capital provided is sensitive to the company’s
operating cash flows. For example, if the company
is raising debt financing, it should have adequate
coverage to fulfill the interest obligations and
eventually repay the debt.

 TYPES OF M&A FINANCING

EQUITY DEBT MIXED

Ccompanies may sell Raising debt for M&A Depending on their

equity shares and raise financing. In times of finances and their
cash for M&A financing. low-interest rates, debt willingness to exercise
control, companies
Alternatively, they can is a cheaper source of
could use any one or a
use their stock as M&A financing when
mix of equity and debt
consideration instead compared to equity
to fund M&A
of cash financing.
transactions.
PAYMENT
MODES FOR
MERGER
TRANSACTIONS
 STOCK SWAP

The acquiring company using equity as

a currency (instead of cash) to acquire
the shares of the target company.
It helps the acquirer preserve cash.
Those without a lot of cash reserves can
SOME EQUITY save on their borrowing costs.
The seller’s shareholders get an
FINANCING TYPES opportunity to gain from the future
gains of the combined business.
Sellers also get to defer tax payments
related to any gains on the sale of their
shares.
On the flip side, equity financing
involves issuing new shares, leading to
dilution of ownership for existing
shareholders.
GREEN ARCHER CORPORATION WANTS TO GAIN
CONTROL OF BLUE EAGLE CORPORATION.

BLUE EAGLE CORP. HAS TOTAL EARNINGS BEFORE THE

MERGER OF $200K AND 50K OUTSTANDING SHARES.

STOCK SWAP
MEANWHILE, GREEN ARCHER CORP. HAS TOTAL
EARNINGS OF $500K AND 200K OUTSANDING SHARES.

IF BOTH SHARES COST $30 EACH, IS GREEN ARCHER

CORP. CORRECT IN THINKING THIS MERGER WILL BE
BENEFICIAL FOR IT? YES
 DEBT AND PREFERRED
STOCK FINANCING
Potential earnings dilution may be partially
minimized by issuing a convertible
security.
A convertible issue may allow the acquiring
company to comply with the seller’s
income objectives without changing its
SOME EQUITY own dividend policy.
FINANCING TYPES Convertible preferred stock also represents
a possible way of lowering the voting
power of the acquired company. This
reduction of voice in management can be
important, especially f the seller is a closely
held corporation.
The convertible preferred debenture or
stock may appear more attractive to the
firm being acquired because it combines
senior security protection with a portion of
the growth potential of common stock
 DEFERRED PAYMENT PLAN (DPP)
SOME EQUITY
FINANCING TYPES The acquiring firm agrees to make a
specified initial payment of cash or stock.
if it can maintain or increase earnings to
pay additional compensation.
C CORP HAS ANNUAL PROFITS OF $475K, $550K, $650K,
AND $500K IN THE PAST 4 YEARS RESPECTIVELY.
AFTER A HOSTILE TAKEOVER, W CORP GOT THE IT
EARLY THIS YEAR IT HAD A BASE-EARNING OF $400K.

DPP
AT THE TIME OF THE TAKEOVER, C CORP'S
SHAREHOLDERS WERE GIVEN 300K W CORP. STOCKS.
IF THE MARKET VALUE OF W CORP'S STOCK IS $30 PER
SHARE ITS P/E RATIO IS 8, AND IT HAD NO CHANGE IN
SHARE PRICE,

HOW MANY ADDITIONAL SHARES SHOULD IT GIVE C

COMPANY'S SHAREHOLDERS?
 CASH
SOME EQUITY
FINANCING TYPES THE PRICE TO BE OFFERED USUALLY
DEPENDS ON THE VALUE OF THE FIRM.
THEREFORE, IT IS IMPORTANT THAT THE
FIRM IS EVALUATED FIRST BEFORE THE
ACQUIRING COMPANY DECIDES ON A
SPECIFIC PURCHASE PRICE.
THRIVE INC. IS ANALYZING THE ACQUISITION OF KING
LTD. FOR $1M. KING LTD. HAS AN EXPECTED CASH
FLOW OF $100K PER ANNUM FOR THE NEXT 5 YEARS,
AND $150K FOR THE NEXT 15 YEARS AFTER THAT.

KING LTD. ALSO HAS A TAX LOSS CARRY FORWARD CASH

AMOUNTING TO $50K THAT CAN BE USED
IMMEDIATELY BY THRIVE INC. UPON TAKING OVER.
ASSUMING A 40% TAX RATE IT WILL SHIELD THAT
PERCENTAGE OF PROFITS FROM TAXES
1. DECIDE ON AN AMOUNT BASED ON INFORMATION
ONCE THE MERGER IS DONE,
REGARDING THE TARGET FIRM.
2. CALCULATE CASH OUTFLOW FIRST. USE THE
A SYNERGISTIC BENEFIT OF $10K ADDITION TO THE
POTENTIAL PURCHASE PRICE. MAKE SURE TO
CASH FLOW PER ANNUM WILL BE CREATED AS WELL.
SUBTRACT THE TAX SHIELD FROM THE TAX LOSS
CARRY FORWARD VALUE (IF ANY).
3. CALCULATE THE CASH INFLOW NEXT. USE THE
PRESENT VALUE OF ANNUITY (SEE NEXT SLIDE) TO
FIND THE PRESENT VALUE FACTOR TO BE USED FOR
THE TWO DISTINCT TIME FRAMES INCLUDED IN THE
POTENTIAL AGREEMENT.
4. CALCULATE THE NET PRESENT VALUE OF THE FIRM.
5. DECIDE IF THERE IS A NEED TO ADJUST THE BID
PRICE OR DECREASE IT.
 UNDERSTANDING PURCHASE PRICE
To estimate the cash flow of a sale transaction, it is critical to understand the fundamental
elements of valuation, including enterprise and equity values, multiples and goodwill.

Total Enterprise Value (TEV) Most agreements define the value of

Gross market value of a company
Synonymous with the transaction
value of an M&A deal.
Most common method to determine
TEV is the Market Approach that
calculates it by taking a financial
metric of the company’s annual
revenues or EBITDA and applying a
multiple.
Absent a transaction, TEV is often
calculated by estimating multiples
based on valuations of comparable
publicly traded companies or similar
private company transactions.
the transaction as the TEV, but the
actual purchase price is an adjusted
value reflecting that the sellers retain
any cash at the closing but are
responsible for the repayment of any
debt remaining with the company.
Hence the term for the purchase
price as “debt-free” and “cash-free.”
Most buyers are interested only in
acquiring the operating assets of the
company while assuming its
operating liabilities. These comprise
the net operating assets that are
employed to generate cash flow.
THE TRANSACTION MULTIPLE
A method to look at the past M&A transactions and value a comparable company using precedents.
STEPS TO FIND THE MULTIPLE:
1. Identify the transaction
a. Company websites
b. Industry websites
c. Bloomberg CACs
2. Identify the right multiples
a. Transaction time
b. The companies revenue involved in the transactions
c. Type of business
d. The location
3. Calculate the Transaction Multiple Valuation
a. EV/EBITDA: Used because EV and EBITDA both account for debt. The good range of EV/EBITDA is 6X
to 15X.
b. EV/Sales: Significant for certain cases where EV/EBITDA doesn’t work. A start-up has a negative
EV/EBITDA. And that’s why for small businesses that just got started, analysts use EV/Sales multiple.
The usual range of EV/Sales is 1X to 3X.
c. V/EBIT: Essential because it takes the wear and tear of the company into account. For technology
and consulting companies (the companies that are not so capital intensive), EBIT and EBITDA don’t
make much difference. EBIT is lesser than EBITDA because depreciation and amortization are
adjusted in EBIT. As a result, EV/EBIT is usually higher than EV/EBITDA.
The usual range of EV/EBIT is 10X to 20X.
 THE EBITDA MULTIPLE
A financial ratio that compares a company’s Enterprise Value to its annual EBITDA
(can be either a historical figure or a forecast/estimate). This multiple is used to
determine the value of a company and compare it to the value of other, similar
businesses.
 EXAMPLE:
ABC Wholesale Corp has a Market Cap of $69.3B as of March 1, 2018, a cash
balance of $0.3B, and debt of $1.4B as of December 31, 2017. For the full year of
2017, its EBITDA was reported at $5.04B and the current analyst consensus
estimate for 2018 EBITDA is $5.5B. Find the historical and forward-looking
multiples.
SOLUTION:
Calculate the Enterprise Value (Market Cap plus Debt minus Cash)
EV = $69.3 + $1.4 – $ 0.3 = $70.4B
Divide the EV by 2017 EBITDA
EV/EBITDA(2017) = $70.4 / $5.04 = 14.0x
Divide the EV by 2018 EBITDA
EV/EBITDA (2018) $70.4 / $5.50 = 12.8x
 For example, a potential buyer has
TRANSACTION proposed a transaction value, or TEV,
of $30 million based on their
VALUE AND
expectation of EBITDA of $5 million.
PURCHASE Such a transaction implies an EBITDA
PRICE multiple of 6 times.
BUSINESS FAILURE
A situation in which a company or other business ceases
operations because it is unable to generate sufficient revenue
to cover its expenses. For example, if a company is unable to
service debt it may file for bankruptcy and stop operating.
Business failure is relatively common in the first year or so of
operations because the owner is unable to compete for any
number of reasons.
ENDE