Advanced Financial Modeling: Mergers and Acquisitions (M&A)

Advanced Financial Modeling
Mergers and Acquisitions (M&A)
corporatefinanceinstitute.com
Table of Contents
01. 02. 03. 04. 05.

Introduction M&A Model Acquirer & Target Deal Assumptions Closing Balance Sheet
Overview Models
06. 07. 08.

Pro Forma Model Accretion & Dilution Summary & Sensitivity
CFI Instructors
Meet the global team of CFI instructors
Tim Vipond Justin Sanders Scott Powell

CEO & Instructor Instructor Director & Instructor
Vancouver London Vancouver
Lisa Dorian Ryan Spendelow

Director & Instructor Instructor
New York Hong Kong
Career Map
Investment
banking Private
Equity equity
research
Sales &
trading Portfolio
management
Commercial Banks Institutions

banking
Research
= =
Due
diligence
Corporate
Public Corporates development
accounting
Transaction
advisory Investor
relations
Treasury
Valuations
FP&A
Advanced Financial Modeling
Operating Models Leveraged Buyouts Mergers & Acquisitions

• Focus on revenue build up • Detail around debt and capital • High degree of detail around the
structure modeling Pro Forma model
• Focus on operating costs and capital
cost build up • Focus on covenant modeling for • Analysis of synergies, revenue
lenders enhancements, cost structures
• Consolidation of many business units
• Complex structures for rate of • Integration considerations
• Focus on drivers, unit economics,
return analysis by investor type
internal value creation • Accretion / Dilution analysis
• Focus is on financial structuring,
• Risk management • Deal terms and structuring
as opposed to operations
• Financial planning & analysis • Focus on the strategic impact of
combining the businesses
• Share price impact
Course Objectives
Learn how to structure an Setup all the assumptions

01. M&A model with the most
efficient way
02. and drivers required to
buildout the M&A model
Calculate all the necessary

03. adjusting entries required to create
a post-transaction balance sheet
04. Integrate the acquirer and the
target into a pro form model
Calculate the accretion or Perform sensitivity analysis on key

05. dilution of key per share
metrics post transaction
06. assumptions and assess the overall
impact of the transaction
M&A Model Overview
Terms and definitions
Mergers & Acquisitions – General Transaction Terms
Acquirer Transaction Close Date

The firm which is purchasing a company in the acquisition (the buyer) The date on which the transaction is expected to be officially completed
Target Restructuring Charges

The firm that is being acquired (the seller) Any fees or charges related to early debt repayments that are part of a restructuring
Merger Equity Issuance Fees

The purchasing company acquires all of the target company Underwriting fees changed by investment banks to issue
shares/assets the target company ceases to exist (acquirer survives) equity in connection with the transaction
Acquisition Debt Issuance Fees

The purchasing company acquires more than 50% of the shares of the Underwriting fees changed by investment banks to issue debt in
acquired company and both companies survive (both companies survive). connection with the transaction
Asset Deal Other Closing Costs

The acquirer purchases only the assets of the target company (not it’s shares) This may include due diligence fees, legal fees, accounting fees, etc.
related to the deal
Share/Stock Deal
The acquirer purchases the shares of the target company
Mergers & Acquisitions – Deal Consideration and Synergies
Fully Diluted Shares Outstanding Timing of Synergies

The number of shares a company has outstanding after How long it is estimated to take to realized the synergies in the transaction
options, convertible securities, etc. are exercised
Pro Forma Shares Outstanding Takeover Premium

The number of shares outstanding after the transaction has closed
the percentage above the targets current share price (or VWAP) the offer
and additional equity has been issued
price represents
Share Issuance Discount Offer Price

Any discount (if any) to the current market price that will be used The price offered per share by the acquirer
to determine the # of share the target receives
VWAP Cash Consideration

Volume Weighted Average Price, often used reference to the The portion of the purchase price given to the target in the form of cash
takeover premium (i.e. 15% above the 20-Day VWAP)
Synergies Stock Consideration

Cost savings and revenue enhancements that are expected to be The portion of the purchase price given to the target in the form of
achieved in connection with a merger/acquisition shares of the acquirer’s stock
Revenue Enhancements Share Exchange Ratio

Increases in revenue that are expected due to cross-selling, The offer price for the targets shares divided by the
up-selling, pricing changes, etc. acquirer's share price.
Mergers & Acquisitions – Purchase Price Allocation and Deal Metrics
Identifiable Assets Purchase Price Allocation

An asset that can be assigned a fair value and can include both The breakdown of the total purchase price between
tangible and intangible assets. net identifiable assets and goodwill
Net Book Value of Assets Accretion

Book value of assets minus book value of liabilities An improvement in per share metrics post transaction
(after issuing additional shares)
Excess Purchase Price Dilution

The value of the purchase price over and above the net book value of A worsening of per share metrics post transaction
assets (total purchase price minus net book value of assets) (after issuing additional shares)
Fair Value Adjustments Intrinsic Value

The increase or decrease in the net book value of assets to The estimated value of the business using discounted cash flow
arrive at the fair market value analysis (often on a per share basis)
Goodwill Sensitivity Analysis

The excess purchase price over and above the target’s net A method of testing how sensitive certain outputs in the model are to
identifiable assets (after fair value adjustments) changes in certain assumptions
M&A case study
Online Company Inc. Brick ‘n’ Mortar Co. Pro Forma Business
• The acquirer • The target • 2-3% increase in revenue due to
cross-selling, pricing, etc.
• Seeking a multi-channel strategy • Has a lackluster online presence
• ~8% reduction in cost structure due
• Wants physical locations in major cities • Developed very high-performing retail
to savings in COGS, marketing and
locations with strong same-store sales
• Does not have internal expertise to open G&A / overhead
growth (i.e. organic growth)
retail locations
• Ability to significantly increase in
• Has a proven track record of opening
• Has identified targets and found the leverage in pro forma business
new locations in major cities (i.e. capital
“best” option
growth) • Makes a great deal of strategic sense
• Seeking a friendly acquisition of Brick ‘n’
• Management team is amenable to • Accretive to key per share metrics
Mortar Co.
transaction and has presented it the
• Significant value creation expected
• Sees synergies in both increased revenue offer to their board of directors
(cross-selling, new brands, etc.) and cost
• Key members of the team would stay on
savings (inventory management,
for at least 1-3 years as part of the
manufacturing, overhead)
transition
Table of Contents
01. 02. 03. 04. 05.

Introduction M&A Model Acquirer & Target Deal Assumptions Closing Balance Sheet
Overview Models
06. 07. 08.

Pro Forma Model Accretion & Dilution Summary & Sensitivity
M&A Process
10 step M&A process
10
9 Integration
8 Financing
7 Purchase &
Sales Contract
6 Due
Diligence
5 Negotiation
4 Valuing &
Evaluating
3 Early
Discussion
2 Searching
1 for Target
Acquisition
Criteria
Acquisition
Strategy
M&A templates and resources
Here are some of the most common templates and resources required
for each step of an acquisition
❑ NDA / Confidentiality agreement

❑ Confidential Information Memorandum (CIM)
❑ Financial Model (included in this course)
❑ Due Diligence Checklist
❑ Due Diligence Report
❑ Definitive Purchase Agreement
Strategic versus financial buyers
This LBO
VS
course course
Strategic buyers Financial buyers

• Horizontal or vertical expansions • Private equity
• Involves identifying and delivering • Leverage for maximum equity returns
operating synergies
• Hard synergies – cost synergies
• Soft synergies – revenue synergies
Strategic acquisitions
Involves identifying and delivering synergies
• Hard synergies → cost synergies • Soft synergies → revenue synergies

• $1 of cost saving = $1 of pre-tax • $1 of revenue synergy less than $1 of
profit pre-tax profit
• Cost savings from • Cross selling
• Economies of scale • Geographic expansion
• Factory overhead reduction • Corporate overhead reduction
M&A model conceptual representation
Transaction
Synergies costs
Value Created
(Benefit)
Total Net
Value of
Stand-
the
alone
Consideration Target
enterprise
Paid Business
value
M&A model conceptual representation
Transaction Value Lost

Synergies costs
Consideration
Stand- Paid
alone Total Net
enterprise Value of
value the Target
Business
M&A Modeling Steps
M&A financial modeling steps
Acquirer & Target Models Deal Assumptions Closing Balance Sheet Pro Forma Model
Map financials, 3- Inputs, synergies, Acquirer + target, Combination, synergies,

statement model, financing, sources/uses, adjustments, pro forma 3-statement, DCF
DCF model PPA
Accretion/Dilution Sensitivity Analysis
Pro forma per share Intrinsic value per share,

metrics changes in assumptions
Acquirer & Target
Models
Acquirer model steps
Acquirer Model
• Assumptions
• Income Statement
• Balance Sheet
• Cash Flow Statement
• Supporting Schedules
• DCF Model
Target model steps
Target Model
• Assumptions
• Income Statement
• Balance Sheet
• Cash Flow Statement
• Supporting Schedules
• DCF Model
M&A financial modeling steps
Revenue Revenue
Raw Materials
Cost of Goods Sold
Direct Labor
Marketing, Advertising &
Sales
Promotion
Advertising
General & Administrative
Promotion
Depreciation & Amortization Office Expense
Insurance
Depreciation & Amortization
Deal Assumptions
Deal Assumptions
Deal Assumptions
• Transaction Inputs
• Scenarios (Synergies & Financing)
• Purchase Price
• Sources & Uses of Cash
• Purchase Price Allocation (PPA)
Closing Balance
Sheet
Closing balance sheet
Pro Forma
Model
Building a pro forma model
Pro Forma Acquirer Target Adjust-

Model Model Model ments
Accretion & Dilution
Accretive Dilutive
EPS Before EPS After EPS Before EPS After

Acquisition Acquisition Acquisition Acquisition
EPS Impacted by From of Consideration
All Cash All Shares
Summary & Sensitivity
Sensitivity Analysis
M&A Data – PitchBook and
Capital IQ
Pitchbook and Capital IQ

Advanced Financial Modeling: Mergers and Acquisitions (M&A)

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Advanced Financial Modeling

Mergers and Acquisitions (M&A)

01. 02. 03. 04. 05.

06. 07. 08.

Meet the global team of CFI instructors

Tim Vipond Justin Sanders Scott Powell

Lisa Dorian Ryan Spendelow

Commercial Banks Institutions

Operating Models Leveraged Buyouts Mergers & Acquisitions

Learn how to structure an Setup all the assumptions

Calculate all the necessary

Calculate the accretion or Perform sensitivity analysis on key

Mergers & Acquisitions – General Transaction Terms

Acquirer Transaction Close Date

Target Restructuring Charges

Merger Equity Issuance Fees

Acquisition Debt Issuance Fees

Asset Deal Other Closing Costs

Mergers & Acquisitions – Deal Consideration and Synergies

Fully Diluted Shares Outstanding Timing of Synergies

Pro Forma Shares Outstanding Takeover Premium

Share Issuance Discount Offer Price

VWAP Cash Consideration

Synergies Stock Consideration

Revenue Enhancements Share Exchange Ratio

Mergers & Acquisitions – Purchase Price Allocation and Deal Metrics

Identifiable Assets Purchase Price Allocation

Net Book Value of Assets Accretion

Excess Purchase Price Dilution

Fair Value Adjustments Intrinsic Value

Goodwill Sensitivity Analysis

01. 02. 03. 04. 05.

06. 07. 08.

❑ NDA / Confidentiality agreement

Strategic buyers Financial buyers

Involves identifying and delivering synergies

• Hard synergies → cost synergies • Soft synergies → revenue synergies

Transaction Value Lost

Map financials, 3- Inputs, synergies, Acquirer + target, Combination, synergies,

Accretion/Dilution Sensitivity Analysis

Pro forma per share Intrinsic value per share,

• Cash Flow Statement

• Cash Flow Statement

Depreciation & Amortization

• Scenarios (Synergies & Financing)

• Sources & Uses of Cash

• Purchase Price Allocation (PPA)

Pro Forma Acquirer Target Adjust-

EPS Before EPS After EPS Before EPS After

EPS Impacted by From of Consideration

All Cash All Shares

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