Merger Model Assessment Centre Case Study

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Learn more here: https://breakingintowallstreet.com/co... • In this Merger Model tutorial, you'll learn how to complete a merger model case study exercise given at an assessment center. • By http://breakingintowallstreet.com/ Financial Modeling Training And Career Resources For Aspiring Investment Bankers • You will also learn how to set up a simplified model, how to calculate accretion / (dilution) under different scenarios, and how to calculate the pro-forma credit stats and ratios for the combined company. • http://youtube-breakingintowallstreet... • Before Excel File: http://youtube-breakingintowallstreet... • After Excel File: http://youtube-breakingintowallstreet... • Table of Contents: • 3:01 How to Interpret the Case Study and Model Requirements • 5:18 Financial Information for Companies A and B • 5:31 How to Calculate the Missing Information • 8:02 Entering the Key Deal Assumptions • 10:55 How to Combine the Income Statements • 14:36 How to Calculate Accretion / (Dilution) and Credit Stats • 16:46 Answering the Case Study Questions • 21:06 Key Takeaways from the Case Study • 22:39 Recap and Summary • Step 1: Read and interpret the instructions... and understand where to cut corners! • Requirements: Need to be able to change the purchase price and % debt and stock used... but cash and the foregone interest on cash are unnecessary, which simplifies things. • Also, they've given us incomplete information in a few spots and we need to go through and calculate some figures for Company A and Company B, such as the shares outstanding. • SKIP the formatting! • Step 2: Enter the financial information for Company A and Company B. • Fairly straightforward, but remember that we need to calculate a few additional numbers for this to work, such as the shares outstanding for each company and the Net Income and EPS, at least for the buyer. • Step 3: Calculate the missing information - Net Income, EPS, and Share Counts. • Start with Pre-Tax Income, then calculate Net Income based on the tax rates for both companies, and then EPS... not completely necessary for Company B, but definitely need it for Company A. • Then, calculate the Share Count for both companies and the Enterprise Value (just for reference). • Step 4: Go up to the top and enter the key assumptions, starting with Question #1. • To save time, skip the (1 + Premium) * Share Price * # Shares calculation and just calculate the purchase price based on the premium to Company B's Market Cap instead -- same result either way. • Calculate %s for debt and stock, then the amount of debt raised, debt interest rate, and shares issued. • Then, fill in the information about the synergies -- no information on expenses here, so we leave it out. • Step 5: Combine the Income Statements for Company A and Company B. • Start with the Synergies, and then combine all the other line items, factoring in those synergies on top. Remember to factor in acquisition effects, such as additional interest expense. • Calculate down to EPS, making sure you include the NEW shares issued in the transaction and increase Company A's share count as appropriate. • Step 6: Calculate Accretion / (Dilution) and the Pro-Forma Credit Stats. • Take the combined company's EPS and divide by the buyer's EPS and subtract 1. • For the credit stats, the two key ones are the Leverage Ratio (Net Debt / EBITDA here) and the Coverage Ratio (EBITDA / Interest) - so calculate those each year. • Step 7: Create sensitivities... if you have time. • Here, we would argue it's pointless since it takes more time and effort to set them up, and they don't save much time beyond the model we already have -- so we're skipping this step. • Step 8: What is the POINT of this case study exercise? • Takeaway #1: Even if we pay a higher premium for a seller, the deal might be MORE accretive depending on the purchase method... debt tends to be less expensive than stock. • Takeaway #2: Company B is a very cheap asset -- MUCH lower P / E and EV / EBITDA multiples than Company A. • When a more expensive buyer acquires a much less expensive seller, the deal will almost always be accretive. Company B's significantly higher tax rate also makes a difference -- Company A gets free money after the acquisition since it's only paying 25% in taxes rather than 40%. • Takeaway #3: Using debt tends to produce more accretion than stock, but it also produces higher leverage ratios and lower coverage ratios -- so there is a trade-off between accretion / (dilution) and the credit stats following the deal.

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