Growth Merger/Acquisition Analysis Project

Question:

Professor for this particular paper what do we adjust in the financial projections? For either option of growth or is there a new Excel model for us to look at? If not what are tabs should we be looking at in the eVal model and adjusting for the projections of either a merger or organic growth?

Response:

Good questions, thanks for asking.

First and foremost, this assignment is structured to encourage you think about how a CFO would approach the analysis of growth opportunities for a business - most business want to grow.

Organic growth means to cause the business to grow internally, without having to merge or buy other firms.  Generally this will be a process that is slower and occurs over time.

Merger/Acquisition means that the firm will grow by joining with another firm (merger) or by buying another firm(s).

To boil the answer down to the essentials, organic growth means that the CFO will need to make assumptions about future growth (rates) and financing (borrowing, new stock, retained earnings). To do this analysis with eVal means changing the appropriate "Forecasting Assumptions" to reflect those decisions.  With organic growth, the changes will likely take place incrementally over time.

To examine merger or acquisition means that the firm will need to buy or join with another firm, which means the effects of the strategy will occur at a point in time.  The assets will grow.  The purchase price will have to be paid by new borrowing, new stock, or use of existing retained earnings and cash.  It would probably be best to make those assumptions occur in a single year.  Again, the assumptions showing how the business will change will be made on the eVal "Forecasting Assumptions" worksheet.

In each case, the "Forecasting Assumptions" worksheet in eVal allows you as the analyst to make changes in Sales Growth and related variables, and in how the business is financed (working capital ratios, debt ratios, etc.).

I hope this helps.....

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Question:

I may have missed something. What data are we supposed to put into the eVal model to determine the data that we are to analyze?

Response:

You may want to look at the Q&A section in this week's classroom (Ask the Professor).  I received several similar questions and in the response I tried to explain what should be in the eVal analyses.

Basically, you need to alter the Forecasting Assumptions (Income Statement and Balance Sheet) to reflect what the company will look like after implementing an Organic Growth strategy or becoming involved in a Merger or Acquisition.  Essentially, your job is to make the adjustments so that the balance sheet and income statement reflect the outcomes of each strategy.

The Organic Growth strategy probably means that changes occur over time.  The Merger/Acquisition strategy will probably include more immediate changes in assets, liabilities, and other operating variables.

I will post this answer, too, so others can see the information.

Hope this helps.

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Questions About Assignment 4

Questions:

I am working on this assignment and I have completed the organic growth strategy, but I am struggling with the merger acquisition growth strategy. I feel like I am missing some information on how I'm supposed to project or create such a strategy. I downloaded your model for the Merger but that sheet doesn't seem to produce any more information. Any help would be greatly appreciated, maybe something is just skipping by me.

Response:

The key to the forecast for both strategies is to figure out what the balance sheet and income statement will look like under each of the scenarios.  Yes, you need to develop, explain, and defend the assumptions.

For example, for an acquisition, the asset base will probably increase.  There will have to be new debt or equity (or both) types of financing.  Normally sales revenues will increase.  It will also be necessary to think about what happens to the cost structure under each of the scenarios, etc.

As I am sure you saw, there are worksheets provided to summarize the assumptions for each of the scenarios (one sheet is provided for those using the eVal model, another sheet is provided for those using the Prof. Stevens projection model). The sheet of assumptions is to be included with the submission.

It may be helpful to look at the sample assignment - it may offer some ideas, too.

Hope this helps.

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