Read Acquired Number of Years for Pension Ibew 46

Investment Cyberbanking interview questions: Merger Model (Basic)

You don't need to understand merger models likewise as an Chiliad&A banker does, but you do demand to more than just the basics, specially if you've had a finance internship or total-time job earlier. It'southward important to know the effects of an acquisition, and understand concepts such as synergies and why Goodwill & Other Intangibles really get created. One thing that'due south not of import? Walking through how all 3 statements are affected by an acquisition. In 99% of cases, yous only care virtually the Income Statement in a merger model (despite rumors to the opposite).

1. Walk me through a basic merger model

"A merger model is used to analyze the financial profiles of 2 companies, the purchase price and how the purchase is made, and determines whether the buyer's EPS increases or decreases.

Step 1 is making assumptions most the acquisition - the toll and whether it was cash, stock or debt or some combination of those. Next, you decide the valuations and shares outstanding of the heir-apparent and seller and project out an Income Argument for each

Finally, you combine the Income Statements, calculation upward line items such every bit Acquirement and Operating Expenses, and adjusting for Foregone Interest on Greenbacks and Involvement Paid on Debt in the Combined Pre-Tax Income line; you apply the buyer's Revenue enhancement Rate to get the Combined Net Income, and so divide by the new share count to determine the combined EPS."

ii. What's the deviation between a merger and an acquisition?

In that location'south always a buyer and a seller in whatsoever G&A bargain - the difference between "merger' and "acquisition" is more semantic than anything. In a merger the companies are shut to the same size, whereas in an acquisition the buyer is significantly larger.

3. Why would a visitor want to acquire another company?

Several possible reasons:

The buyer wants to proceeds marketplace share by buying a competitor.

The buyer needs to abound more quickly and sees an conquering as a mode to do that.

The buyer believes the seller is undervalued.

The heir-apparent wants to larn the seller'south customers so information technology can upwardly-sell and cross-sell to them.

The buyer thinks the seller has a critical technology, intellectual property or some other "hugger-mugger sauce" it tin use to significantly heighten its business. The buyer believes it can reach significant synergies and therefore make the bargain accretive for its shareholders.

four. Why would an acquisition be dilutive?

An acquisition is dilutive if the additional amount of Net Income the seller contributes is not enough to offset the heir-apparent's foregone involvement on cash, additional interest paid on debt, and the furnishings of issuing boosted shares.

Conquering effects - such equally acquittal of intangibles - can as well make an acquisition dilutive.

v. Is there a dominion of thumb for computing whether an acquisition volition be accretive or dilutive?

If the deal involves only greenbacks and debt, yous can sum up the involvement expense for debt and the foregone interest on cash, then compare information technology confronting the seller's Pre-Revenue enhancement Income.

And if it'southward an all-stock deal yous can use a shortcut to assess whether it is accretive.

But if the deal involves cash, stock, and debt, there's no quick rule-of-thumb you can use unless you're lightning fast with mental math.

vi. A company with a higher P/E acquires 1 with a lower P/East - is this accretive or dilutive?

Trick question. You can't tell unless yous also know that information technology'south an all-stock deal. If it'southward an all-greenbacks or all-debt deal, the P/E multiples of the heir-apparent and seller don't affair considering no stock is being issued.

Sure, mostly getting more than earnings for less is good and is more likely to exist accretive but there'due south no hard-and-fast dominion unless it'due south an all-stock deal.

7. What is the rule of pollex for assessing whether an M&A deal volition be accretive or dilutive?

In an all-stock deal, if the buyer has a higher P/Due east than the seller, it will be accretive; if the buyer has a lower P/Eastward, it will be dilutive.

On an intuitive level if you're paying more for earnings than what the market values your own earnings at, you can guess that information technology will be dilutive; and too, if yous're paying less for earnings than what the market values your ain earnings at, you can guess that information technology would exist accretive.

viii. What are the complete effects of an acquisition?

1. Foregone Interest on Greenbacks - The heir-apparent loses the Interest it would take otherwise earned if information technology uses cash for the conquering.

2. Additional Interest on Debt - The heir-apparent pays additional Interest Expense if it uses debt.

3. Additional Shares Outstanding - If the buyer pays with stock, it must issue additional shares.

iv. Combined Financial Statements - Afterwards the acquisition, the seller's financials are added to the heir-apparent'due south.

5. Cosmos of Goodwill & Other Intangibles - These Balance Sheet items that represent a "premium" paid to a visitor's "fair value" also get created.

Note: In that location'south actually more than than this (see the avant-garde questions), but this is commonly sufficient to mention in interviews.

nine. If a visitor were capable of paying 100% in cash for another company, why would it choose NOT to practise and so?

It might exist saving its cash for something else or information technology might be concerned about running low if concern takes a turn for the worst; its stock may also exist trading at an all-time loftier and information technology might be eager to use that instead (in finance terms this would exist "more than expensive" but a lot of executives value having a prophylactic absorber in the course of a large greenbacks balance).

x. Why would a strategic acquirer typically be willing to pay more than for a company than a individual disinterestedness firm would?

Because the strategic acquirer tin realize revenue and cost synergies that the private equity firm cannot unless it combines the visitor with a complementary portfolio company. Those synergies heave the constructive valuation for the target company.

11. Why practice Goodwill & Other Intangibles go created in an conquering?

These stand for the value over the "fair marketplace value" of the seller that the heir-apparent has paid. You lot calculate the number by subtracting the volume value of a visitor from its equity purchase price.

More specifically, Goodwill and Other Intangibles represent things like the value of customer relationships, make names and intellectual property - valuable, simply not truthful fiscal Assets that show up on the Remainder Sheet.

12. What is the difference between Goodwill and Other Intangible Assets?

Goodwill typically stays the aforementioned over many years and is non amortized. It changes only if there'southward goodwill damage (or another acquisition).

Other Intangible Assets, by contrast, are amortized over several years and affect the Income Argument past hit the Pre-Taxation Income line.

There's likewise a divergence in terms of what they each stand for, merely bankers rarely go into that level of detail - accountants and valuation specialists worry most assigning each one to specific items.

13. Is there anything else "intangible" besides Goodwill & Other Intangibles that could also touch the combined company?

Yes. You could also accept a Purchased In-Process R&D Write-off and a Deferred Acquirement Write-off.

The first refers to whatsoever Enquiry & Development projects that were purchased in the acquisition simply which have not been completed even so. The logic is that unfinished R&D

projects crave significant resources to complete, and as such, the "expense" must exist recognized as part of the acquisition.

The second refers to cases where the seller has collected greenbacks for a service merely not yet recorded it every bit acquirement, and the buyer must write-downwardly the value of the Deferred Revenue to avoid "double-counting" revenue.

xiv. What are synergies, and can you provide a few examples?

Synergies refer to cases where 2 + ii = 5 (or 6, or 7...) in an acquisition. Basically, the buyer gets more value than out of an acquisition than what the financials would predict.

In that location are 2 types: revenue synergies and price (or expense) synergies.

Revenue Synergies: The combined company can cantankerous-sell products to new customers or up-sell new products to existing customers. Information technology might also be able to aggrandize into new geographies equally a result of the bargain.

Cost Synergies: The combined company can consolidate buildings and authoritative staff and can lay off redundant employees. It might also be able to close down redundant stores or locations.

15. How are synergies used in merger models?

Acquirement Synergies: Commonly you add these to the Acquirement figure for the combined company and then assume a certain margin on the Revenue - this boosted Acquirement then flows through the rest of the combined Income Argument.

Toll Synergies: Normally you reduce the combined COGS or Operating Expenses by this amount, which in turn boosts the combined Pre-Taxation Income and thus Net Income, raising the EPS and making the bargain more accretive.

16. Are revenue or cost synergies more important?

No i in M&A takes revenue synergies seriously considering they're so hard to predict. Cost synergies are taken a bit more seriously because information technology's more straightforward to see how buildings and locations might be consolidated and how many redundant employees might be eliminated.

That said, the chances of whatever synergies really being realized are most 0 and then few take them seriously at all.

17. All else being equal, which method would a company prefer to use when acquiring some other visitor - greenbacks, stock, or debt?

Assuming the heir-apparent had unlimited resources, it would ever prefer to use cash when buying another company. Why?

• Greenbacks is "cheaper" than debt because interest rates on cash are commonly under 5% whereas debt interest rates are almost e'er higher than that. Thus, foregone interest on cash is nearly e'er less than additional interest paid on debt for the aforementioned amount of cash/debt.

• Greenbacks is also less "risky" than debt because there'south no take chances the buyer might fail to raise sufficient funds from investors.

• Information technology'due south hard to compare the "cost" directly to stock, but in full general stock is the about "expensive" mode to finance a transaction - remember how the Cost of Equity is well-nigh always higher than the Toll of Debt? That same principle applies hither.

• Cash is besides less risky than stock considering the heir-apparent's share toll could modify dramatically in one case the acquisition is announced.

18. How much debt could a company issue in a merger or acquisition?

Generally you would look at Comparable Companies/ Precedent Transactions to determine this. You would use the combined visitor's LTM (Last Twelve Months) EBITDA figure, find the median Debt/EBITDA ratio of whatsoever companies you're looking at, and apply that to your ain EBITDA figure to get a rough thought of how much debt you could raise.

You lot would also look at "Debt Comps" for companies in the same industry and encounter what types of debt and how many tranches they have used.

19. How do you decide the Purchase Cost for the target company in an acquisition?

You utilize the same Valuation methodologies we already discussed. If the seller is a public company, you lot would pay more attention to the premium paid over the current share toll to make certain it's "sufficient" (more often than not in the 15-30% range) to win shareholder approval.

For private sellers, more than weight is placed on the traditional methodologies.

20. Let's say a company overpays for another visitor - what typically happens after and can y'all give any recent examples?

There would be an incredibly high amount of Goodwill & Other Intangibles created if the price is far above the off-white market place value of the company. Depending on how the acquisition goes, there might be a large goodwill harm accuse later if the visitor decides it overpaid.

A contempo example is the eBay / Skype bargain, in which eBay paid a huge premium and extremely loftier multiple for Skype. It created excess Goodwill & Other Intangibles, and eBay later on concluded upwards writing down much of the value and taking a large quarterly loss equally a result.

21. A buyer pays $100 million for the seller in an all-stock deal, but a day later the market decides information technology's only worth $50 million. What happens?

The buyer's share price would fall past whatever per-share dollar amount corresponds to the $50 one thousand thousand loss in value. Notation that information technology would not necessarily exist cut in half.

Depending on how the deal was structured, the seller would effectively only exist receiving one-half of what it had originally negotiated.

This illustrates one of the major risks of all-stock deals: sudden changes in share price could dramatically bear upon valuation.

22. Why do most mergers and acquisitions neglect?

Like and so many things, M&A is "easier said than done." In practice information technology's very difficult to larn and integrate a different company, really realize synergies and also turn the acquired company into a assisting division.

Many deals are also done for the wrong reasons, such as CEO ego or pressure from shareholders. Any deal washed without both parties' all-time interests in mind is likely to neglect.

23. What role does a merger model play in deal negotiations?

The model is used every bit a sanity check and is used to test various assumptions. A company would never determine to practice a deal based on the output of a model.

It might say, "Ok, the model tells us this deal could work and be moderately accretive -it's worth exploring more."

It would never say, "Aha! This model predicts 21% accretion - we should definitely acquire them now!"

Emotions, ego and personalities play a far bigger part in M&A (and whatever type of negotiation) than numbers do.

24. What types of sensitivities would y'all look at in a merger model? What variables would you lot look at?

The most common variables to look at are Purchase Price, % Stock/Cash/Debt, Revenue Synergies, and Expense Synergies. Sometimes y'all also look at different operating sensitivities, similar Revenue Growth or EBITDA Margin, merely it's more common to build these into your model as different scenarios instead.

You might look at sensitivity tables showing the EPS accretion/dilution at unlike ranges for the Purchase Price vs. Toll Synergies, Purchase Toll vs. Revenue Synergies, or Purchase Price vs. % Greenbacks (and and so on).

- prepared by breakingintowallstreet.com and mergersandinquisitions.com.

goinswhicenty.blogspot.com

Source: https://finexecutive.com/en/news/_investment_banking_interview_questions_merger_model_basic_2_4_2015

Share this post