Mergers and acquisitions
By the end of this lecture you will be able to
- Explain why companies buy and sell, and the most a disciplined buyer should pay
- Build a merger model: offer and premium, sources and uses, purchase price allocation with deferred tax, goodwill and pro forma EPS
- Compute accretion and dilution, breakeven synergies and the cost-of-funding shortcut, and explain why accretion is not value creation
- Value synergies net of the costs to achieve them and run a contribution analysis
- Compare cash and stock, fixed and floating exchange ratios, collars, and asset and share deals
- Describe a sale process from teaser to closing, with MAC clauses, break fees, fairness opinions and hostile bids
This is the job most of you want. An M&A banker helps one company buy another, or helps an owner sell. Today we build a full merger model in numbers, from the offer price to the buyer's earnings per share, then step back to the questions that boards and interviewers care about: how much the buyer can afford to pay, who keeps the synergies, how the deal is structured and run, and why a deal that raises earnings per share can still destroy value.
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Interview questions on this lecture
Why do companies acquire other companies?
To grow faster than they could organically, to capture cost or revenue synergies, to gain scale and market position, or to acquire capabilities, technology or reserves. The test is whether the business is worth more under their ownership than the price.
Walk me through an accretion and dilution analysis.
Add the target’s net income to the buyer’s, plus after-tax synergies. Subtract, after tax, the cost of funding (interest on new debt, interest lost on cash used), the extra D&A from asset write-ups and new intangibles in the purchase price allocation, and the amortisation of financing fees. Divide by the buyer’s shares plus any new shares issued, and compare with the buyer’s standalone EPS.