Chapter_09

Chapter_09 - Using Financial Modeling Techniques to Value...

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Using Financial Modeling Techniques to Value and Structure Mergers & Acquisitions
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Course Layout: M&A & Other Restructuring Activities Part IV: Deal Structuring & Financing Part II: M&A Process Part I: M&A Environment Payment & Legal Considerations Public Company Valuation Financial Modeling Techniques Business & Acquisition Plans Search through Closing Activities Part V: Alternative Strategies Accounting & Tax Considerations Business Alliances Divestitures, Spin-Offs & Carve-Outs Bankruptcy & Liquidation Regulatory Considerations Motivations for Part III: M&A Valuation & Modeling Takeover Tactics and Defenses Financing Strategies Private Company Valuation Cross-Border Transactions
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Learning Objectives Primary learning objective: Provide students with a basic understanding of how to use financial models to value and Secondary learning objectives: Provide students with a knowledge of How to estimate the value of synergy; Commonly used relationships in building M&A valuation models; and How to use models to estimate the purchase price range, initial offer price for a target firm, and to evaluate the feasibility of financing the proposed offer price.
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Step 1: Value acquirer and target as standalone firms Step 2: Value acquirer and target firms including synergy Step 3: Determine initial offer price for target firm Step 4: Determine the combined firms’ ability to finance the transaction
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Step 1: Value Acquirer & Target as Standalone Firms Understand determinants of profits and cash flow, i.e., bargaining strength of Customers (size, number, price sensitivity) Current competitors (market share, differentiation) Potential entrants (entry barriers, relative costs) Substitutes (availability, prices, switching costs) Suppliers (size, number, uniqueness) relative to industry participants. Normalize 3-5 years of historical financial information Project normalized cash flow based on expected market growth and changes in profits/cash flow determinants.
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Step 2: Value Acquirer & Target Firms Including Synergy Estimate Sources and destroyers of value Implementation costs incurred to realize synergy Consolidate acquirer and target projected financials including the effects of synergy Estimate net synergy (consolidated firms less values of target and acquirer)
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Projections For Estimated Synergy Year 1 Year 2 Year 3 Year 4 Year 5 Net Sales 1 $200 $220 $242 $266 $293 Cost of sales 2 $160 $176 $194 $213 $234 Anticipated Cost Savings Direct labor $2 $4 $6 $8 $8 Indirect labor $1 $2 $4 $4 $4 Purchased materials $2 $3 $5 $5 $5 Selling expenses $1 $3 $5 $5 $5 Total $6 $12 $20 $22 $22 Cost of sales (incl. synergy) $154 $164 $174 $191 $212 Cost of sales/Net sales 77.0% 74.6% 71.9% 71.8% 72.4% 1 Combined company net sales projected to grow 10% annually during forecast period. 2
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This note was uploaded on 01/28/2011 for the course FIN 315 taught by Professor Welker during the Spring '09 term at IUP.

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Chapter_09 - Using Financial Modeling Techniques to Value...

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