Mergers and acquisitions

FIN 408 Fall 2021

Critical Analysis of an Existing Buy-out:

1) Choose an acquisition of a publicly traded company that closed between August 2016 and August 2019 unless I have given you permission to go outside these boundaries.

2) Assume you are an analyst for the Corporate Treasurer of a firm that is a direct competitor of the acquirer. Your firm has just learned about the deal you are going to study and has asked you to analyze the information available to the public.

Expected Length: 5 to 7 pages excluding graphs and charts

Points to cover in your report: keep it short and sweet, bullet points are great!

A. Summarize the specifics of the completed acquisition: who is the target, who is the acquirer, what industry are they in, what was the deal price[footnoteRef:1], were the target’s shareholders offered cash, stock, both a choice? Describe the deal: was it friendly or hostile? Was there a battle with a competing bidder? Any interesting corporate control issues? (5) [1: Compute the approximate cash value of the acquirer’s offer if the target shareholders receive any portion of their payment as stock based on the recent trading price of the acquirer and show that calculation in your answer to a. ]

B. Summarize the outsiders’ reaction to the deal announcement. Did the business writers and analysts think it made sense? (5)

C. Did the acquirer’s stock price react positively or negatively when the bid was announced? How about the target’s stock? Was the announced agreement a surprise or had it been expected. Do you see any evidence word of the deal leaked out before the announcement? Compute the deal value added based on the changes in the market cap of the target and the acquirer from three days before the announcement to three days after the announcement day and the 20- trading day VWAP for the target. (5) Show the calculation for the DVA in the report and the calculation for the VWAP, probably in an appendix.

D. Comment on the strategic aspects of the deal. Did the deal build on operating or financial synergies? If operating, are they revenue based or cost based or both? Is the deal expected to generate economies of scale or economies of scope or both or neither? Do you think the deal made sense from a strategic perspective? Give at least three reasons for your answer. (5)

E. Are there any deal-specific motives such as tax losses, patents, hidden assets, etc? (5)

F. Comment on the quality of the target’s pre-merger managers, (President/CEO, CFO). Were they long-time industry veterans who are well respected, new folks brought in to shake things up or what? Will the acquirer keep the existing managers or replace them? (5)

G. Evaluate the perceived risks of the target firm and the acquirer by comparing the unique risk factors each firm shows in its pre-merger 10-K filings. Given your evaluation, do you think the acquisition has the potential to reduce the overall risk of the combined firm? Are there risks at the target that the acquirer can help offset? Are there risks at the target that will increase the risk of the acquirer? Explain. (5) List important unique risk factors for each firm and then compare, decide if the combined firm’s risks are lowered by the deal.

H. Compare the product lines of the target and the acquirer. Does the target add to existing lines at the acquirer or fill in holes. (5)

I. Collect the TV/TTM Rev, TV/TTM EBITDA, and TV/TTM EBIT multiples for the target and the deal comps from the Bloomberg data file and separate the deal comps into those that came before and those that came after your deal closed. When you compare the size of the multiples does it look like the acquirer paid the right price, got a good deal or paid too much when you compare the deal multiples to the pre-acquisition comps? Explain your reasoning. Then, complete the same analysis for the post-acquisition comps if there are any available. (10) Show all the deal comps on Bloomberg in a table in the body of your report or an appendix.

J. Collect the Highlight and Income Statement Bloomberg sheets for the target and at least ten possible competitors of the target from Bloomberg[footnoteRef:2]. Start with the target’s comps from the Bloomberg quote sheet and the comps of those comps. You can also use the trading comps from the deal section of Bloomberg if they show up, or the comps the target lists in its 10-K or the comps on Google. You will need historical revenue growth for the target and the comps and Gross Profit, EBITDA, EBIT (EBIT = Operating Income on the Income statement), Operating Cash Flow and Free Cash Flow values. Be sure that you collect the financial information that was available at the time of the announcement. This is usually the last complete fiscal year for each possible comp that ended before the deal you are studying was announced. Create a matrix of key Financial Statistics: Revenue Growth and Gross Profit, EBITDA, EBIT, Operating Cash Flow and Free Cash Flow Margins for the target and the comps. [2: Use the trading comps in Bloomberg, any targets in the Deal Comp section that were acquired AFTER your deal was announced and any firms that show in the relative valuation screen for comps of the target as a source for your ten+ comparable firms. ]

a. Compare the target’s expected revenue growth to that of the comps. Compare the target’s operating margins to the operating margins of the comps. Is the target growing faster or more slowly than the comps? Do its margins compare favorably or unfavorably with the comps? Does this comparative analysis make the target look attractive or not? Summarize what you think are the most important points of comparison between the target and the comps. (10)

K. Sort the matrix from part J. based on historical revenue growth and then on operating margins. Identify firms you think are comparable on each dimension and use this information to settle on a final set of comps for the target. Collect the EV/Revenue, EV/EBITDA and EV/EBIT multiples for your final set of comps from the multiples pages on Bloomberg. Compute the mean and the median of the three multiples for the comp set. Use this information to compute implied Enterprise Value and the implied value per share for the target based on your set of trading comps. (10) Show the sorting process, the sort summary and the multiples from the comp set.

Summarize the valuation analysis by deciding whether your trading comparable companies analysis suggests the acquirer paid too much, got a good deal or paid the right price for the target.

L. Compare the current Revenue Growth and the Gross Profit, EBITDA and EBIT (Operating Income) Margins of the combined firm to those on the Pro Forma based on the annual numbers known at the time of the acquisition. From what you can see now does it look like the merger is working out as planned? Why or Why Not? (5)

M. Summarize your thoughts on whether the acquisition price was too high, too low or just right based on deal comps and trading comps analysis, the comparative attributes of the target relative to the comp set and any other benefits the target brings to the acquirer. Give at least three reasons for your conclusion. Put this at the end of the report. (5)

N. Put the summary and any other important points of information about the transactions in an Executive Summary that is your cover page. Include a price graph for the target on the cover that goes back at least one year before the acquisition and show the acquisition price on the graph[footnoteRef:3]. Also show your estimate of the value of the target from your trading comps analysis. (10) The cover should include information and numbers to back up all the work you did in addition to the merger information. Fill the page. Show off your analysis. Make sure the numbers on the graph axes are legible. [3: Create your own graph, don’t just use a Bloomberg or Yahoo graph. It is impossible to read the axes if you copy a graph and you cannot add your own targets to that. ]

Writing, organization, flow and appearance (15). Remember that you are writing this for someone who does not have the assignment in front of them so use section titles and sub-heads to convey the subject of your discussion.