IB: Mergers & Acquisitions
Annual NOL Usage allowed 338(h)(10) Election
$0
New DTL created 338(h)(10) Election
$0
New DTL created asset purchase
$0
annual NOL Usage allowed Asset purchase
$0
accretion / dilution % change
(pro forma EPS / Acquiror EPS) - 1
other restructurings
- reorganization aimed to increase business profitability - share buyback (when company buys back shares in open market) - workforce reduction - reduces costs and improve earnings performance
what are a few examples of acquisitions?
1. acquisition of assets 2. leveraged buyout 3. management buyout
3 major methods for facilitating the acquisition
1. asset acquisition 2. stock acquisition 3. 338(h)(10) election
name the 4 components of purchase price over book value
1. goodwill 2. new intangible assets 3. asset step up 4. deferred tax adjustments
what are the key variables impacting EPS in a debt and equity raise, respectively?
1. interest rate on debt 2. price per share on equity
3 major steps of an M&A analysis
1. obtain a purchase price 2. estimating sources and uses of funds 3. creating a pro-forma analysis
proforma transaction adjustments
1. post merger cost savings 2. amoritization of newly allocated intangible assets 3. new interest expense 4. new shares raised
name the 4 major transaction adjustments in an accretion/dilution analysis
1. post merger cost savings (synergies) 2. amortiziation of identifiable intangible assets 3. new interest on raised debt 4. new shares and dividends on raised equity
3 general uses of funds in M&A
1. purchase price 2. net debt 3. transaction fees
what are examples of other restructurings?
1. share buybacks 2. workforce reduction 3. debt reconsolidation
DTA Writedown stock purchase
=MAX(0, NOL balance - allowed annual usage * years until expiration)
valuation of assets and liabilities of 338(h)(10) Election
Book values used, but modified for any step-ups or step downs
annual NOL Usage allowed stock purchase
Seller's equity purchase price * MAX(previous three month's adjusted long term rates)
DTA Write Down Asset Purchase
Subtract entire NOL balance from DTA
combined balance sheet of stock purchase
add all seller's assets and liabilities (assume shareholders' equity is wiped out); adjust for write-ups, write downs, and new items
combined balance sheet of asset purchase
add only the seller's assets and liabilities that the buyer is acquiring; adjust for write ups, write downs, and new items created in acquisition
Depreciation from PP&E Write Up 338(h)(10) Election
affects pretax income and tax deductible
Depreciation from PP&E Write up Asset Purchase
affects pretax income and tax deductible
Depreciation from PP&E Write up stock purchase
affects pretax income but not tax deductible
goodwill and other intangibles in 338(h)(10) election
amortization is tax deductible; amortized over 15 years for tax purposes
goodwill and other intangibles in asset purchase
amortization is tax deductible; amortized over 15 years for tax purposes
intangibles treatment of stock sale
amortized for accounting purposes; not tax deductible
intangibles treatment of 338(h)(10) election
amortized for accounting purposes; tax amortized over 15 years and tax deductible
intangibles treatment of asset purchase
amortized for accounting purposes; tax amortized over 15 years and tax deductible
transaction fees
expenses related to the pursuit and close of the transaction 1. investment banking fees 2. legal fees 3. due diligence costs 4. environmental assessment 5. human resources 6. debt fees 7. equity fees
merger
fundamentally the combination of two or more business entities in which only one entity remains (Company A + Company B = Company A)
net debt responsibility of public company
goes to the buyer, is either rolled over, refinanced, or paid down upon acquisition
purchase price - book value
goodwill + intangible assets + step up of existing assets + deferred tax adjustments
complexity in 338(h)(10) Election
inexpensive and quick to execute
complexity in stock purchase
inexpensive and quick to execute
2 types of conglomerates
mixed pure
stock purchases are used for
mostly public and large companies
valuation method used for private company
multiples
goodwill treatment of 338(h)(10) election
not amoritized for accounting purposes; amortized over 15 years for taxes and tax deductible
goodwill treatment of asset purchase
not amoritized for accounting purposes; amortized over 15 years for taxes and tax deductible
goodwill treatment of stock purchase
not amortized for accounting purposes; not amortized for tax purposes and not tax deductible
goodwill and other intangibles in stock purchase
not amortized for tax purposes and not tax deductible
spin off
occurs when a parent company creates a seperate entity and distributes shares in the entity to its shareholders as a dividends
equity carveout
occurs when a parent company sells a percentage of the equity of the subsidiary to the public known as a partial IPO
example of vertical M&A
oil and gas industry exploration and production oil and gas company merged with a oil and gas pipeline company
valuation method used for public company
percent premium above market price, multiples
338(h)(10) Election are used for
private companies; compromise between buyer and seller
acquisition
purchase of a business entity, entities, or an asset or assets. Differs from a merger because the acquirer is typically much larger than the target company
acquisition of assets
purchase of an asset, group of assets, and the direct liabilities associated with those assets
stock purchase is preferred by?
sellers
sellers of 338(h)(10) Election
shareholders
sellers of a stock purchase
shareholders
seller taxes of stock purchase
single taxation - shareholders pay capital gains tax
DTA Writedown 338(h)(10) Election
subtract entire NOL balance from DTA
proxy contest
the acquirer seeks to gain shareholders support to change a decision of the board of directors or management in some way that shareholder in an attempt to garner support in the form of votes - it can prove to be unsuccessful if the target company stock is held by a large number of individuals
acquisition of equity
the purchase of equity interest in a business entity
divestiture
the sale of an interest of a business entity or an asset or group of assets
New DTL Created stock purchase
total asset writeup * buyer tax rate
mixed conglomerate
transaction involve firms that are looking for product extensions or market extensions
pure conglomerate
transactions involving business entities that are completely unrelated
Goodwill created in 338(h)(10) Election
Equity purchase price - seller book value _ seller existing goodwill - PP&E Write up - intangible write up - seller existing DTL + write down of seller existing DTA
Consolidation
a combination of more than one business entity however an entirely new entity (company A + Company B = Company C)
tender offer
a direct solicitation to purchase shareholders shares. because a significant purchase premium is involved in order to try and ensure that enough shareholders would bee willing to sell their shares and allow the acquisition to proceed - costly method for acquiring a business
management buyout (MBO)
a form of acquisition where a company's existing managers acquire a large part of all the business entity
what is the difference between a horizontal and vertical transaction?
a horizontal transaction is between business entities in the same industry a vertical transaction is between business entities operating at different levels within a industry's supply chain
bear hug
a letter to company management regarding an acquisition and demanding a rapid response - letter is not a proposal but rather a demand and arrives without warnings - often made in public and is utilized to encourage management to negotiate in a friendly manner
what is the difference between a merger and a consolidation?
a merger is the combination of two or more business entitites in which only one entity remains. A consolidation is a combination of more than one business entity; however entirely new entity is created
conglomerate
a transaction between two or more unrelated business entities: entities that basically have no business activity in common.
what are three major ways of facilitate an acquisition?
a. Acquisition of assets b. acquisition of equity c. 338(h) 10 election
combined balance sheet in 338(h)(10) election
add all seller's assets and liabilities (assume shareholders equity is wiped out) adjust for writeups, write downs, and new items
walk me through an accretion/dilution analysis (read answer outloud)
an accretion/dilution analysis assesses the EPS impact of the combination of two entities. First, one needs to obtain the purchase price and then the sources and uses of funds needs to be analyzed. The use of funds are comprised of the purchase price plus potentially paying down the target company's net debt and transaction fees. The source of funds will be some combination of equity. debt, or cash on hand. Once we know the sources and uses of funds, we can begin combining the two entities by adding together each target and acquirer line item from revenue down to net income except for items relateing to the target company's net debt.(if we are assuming we are paying down the target company's net debt) and the target company's shareholder equity (because we are paying off the shareholders) So we do not include the target company interest expense and target company shares and dividends on the income statement. In addition, we need to consider four major transaction adjustments. 1. post merger cost savings 2. the amoritization of new intangible assets if we have been able to allocate a portion of the purchase price above book value toward new intangible assets 3. new interest expense if we have raised debt to fund the transaction 4. new shares if we have raised equity to fund the transaction. We can then calculate a new EPS and compare with the original companys EPS in order to assess acretion and dilution
friendly acquisition
an acquisition accomplished in agreement with the targets company management and board of directors; a public offer of stock or cash is made by the acquiring firm and the board of the target companys firm will publicly approve the terms
hostile acquisition
an acquisition that is accomplished not by coming to an agreement with the target company's management or board of directors, but by going through other means to get acquisition approval such as directly to the companys shareholders; a tender offer and proxy fight are ways to solicit support from shareholders
leveraged buyout (LBO)
an acquisition using a significant amount of debt to meet the cost of acquisition
asset divestiture
an asset divestiture is the sale of an asset or group of assets
casual pass
an informal inquiery made to business management. can be done via email, letter, or phone call. a solicitation to managers to discuss a strategic alternative can be a suggestion for acquisition
horizontal merger, consolidation, acquisition
between business entities in the sam industry. such a combination would potentially increase market share of a business in that particular industry
vertical merger, consolidation, acquisition
between business entities operating at different levels within an industry's supply chain. synergies created by merging firms would benefit both
valuation of assets and liabilities of stock purchase
book values used, but modified for any step ups or downs
338(h)(10) election is preferred by?
both buyers and sellers
tax basis of stock purchase
buyer assumes seller's tax basis for assets/ liabilities
seller net operating losses (NOL) in stock purchase
buyer can apply section 382 after transaction to reduce taxes
assets and liabilities of 338(h)(10) Election
buyer gets everything
assets and liabilities of stock purchase
buyer gets everything
assets and liabilities of asset purchase
buyer picks and chooses
tax basis for asset purchase
buyer receives tax step up for asset/ liabilities
tax basis for 338(h)(10) election
buyer receives tax step up for assets/liabilities
asset purchase is preferred by?
buyers
net debt responsibility of private company
can go to the buyer or seller; depends on valuation method, negotiations, and debt contracts
is an equity raise or debt raise typically more dilutive to EPS? What are the exceptions to the common rule?
common rule: equity is more dilutive to EPS than debt if the stock price is overvalued raising equity can be less dilutive than raising debt. Or if the interest rate is higher than the cost of equity, raising debt can be more dilutive than raising equity
seller net operating losses (NOL) in 338(h)(10) election
completely lost in transaction
seller net operating losses (NOL) in asset purchase
completely lost in transaction
complexity in asset purchase
complex and time consuming - need to value and transfer each asset
sellers of an asset purchase
corporate entity
asset purchases are used for
divestitures; distressed sales; some private companies
seller taxes of 338(h)(10) election
double taxation - taxes on purchase price minus fair value as well as on shareholder proceeds
seller taxes of asset purchase
double taxation - taxes on purchase price minus fair value as well as on shareholder proceeds
goodwill created in stock purchase
equity purchase price - seller book value + seller existing goodwill - PP&E Write Up - Existing Deferred Tax Liability (DLT) + write down of seller existing deferred Tax Asset (DTA) + new DTL created
goodwill created in asset purchase
equity purchase price - seller book value + seller existing goodwill - PP&E write up = intangible write up - seller existing DTL _ writedown of seller existing DTA
valuation of assets and liabilities of asset purchase
every single asset/liability must be valued seperately
