Table of Contents

Additional Resources xiii


About the Authors xv


Foreword xvii


Acknowledgments xix


Introduction 1


Structure of the Book 3


Part One: Valuation (Chapters 1–3) 3


Part Two: Leveraged Buyouts (Chapters 4 & 5) 5


Part Three: Mergers & Acquisitions (Chapters 6 & 7) 6


ValueCo Summary Financial Information 8


Part One Valuation 11


Chapter 1 Comparable Companies Analysis 13


Summary of Comparable Companies Analysis Steps 14


Step I. Select The Universe of Comparable Companies 17


Study the Target 17


Identify Key Characteristics of the Target for Comparison Purposes 18


Screen for Comparable Companies 22


Step II. Locate The Necessary Financial Information 23


SEC Filings: 10-K, 10-Q, 8-K, and Proxy Statements 24


Equity Research 25


Press Releases and News Runs 26


Financial Information Services 26


Summary of Financial Data Primary Sources 27


Step III. Spread Key Statistics, Ratios, and Trading Multiples 28


Calculation of Key Financial Statistics and Ratios 28


Supplemental Financial Concepts and Calculations 42


Calculation of Key Trading Multiples 47


Step IV. Benchmark the Comparable Companies 50


Benchmark the Financial Statistics and Ratios 50


Benchmark the Trading Multiples 50


Step V. Determine Valuation 51


Valuation Implied by EV/EBITDA 52


Valuation Implied by P/E 52


Key Pros and Cons 54


Illustrative Comparable Companies Analysis for ValueCo 55


Step I. Select the Universe of Comparable Companies 55


Step II. Locate the Necessary Financial Information 56


Step III. Spread Key Statistics, Ratios, and Trading Multiples 57


Step IV. Benchmark the Comparable Companies 69


Step V. Determine Valuation 74


Bloomberg Appendix 75


Chapter 2 Precedent Transactions Analysis 83


Summary of Precedent Transactions Analysis Steps 84


Step I. Select the Universe of Comparable Acquisitions 87


Screen for Comparable Acquisitions 87


Examine Other Considerations 88


Step II. Locate the Necessary Deal-Related and Financial Information 90


Public Targets 90


Private Targets 93


Summary of Primary SEC Filings in M&A Transactions 93


Step III. Spread Key Statistics, Ratios, and Transaction Multiples 96


Calculation of Key Financial Statistics and Ratios 96


Calculation of Key Transaction Multiples 102


Step IV. Benchmark the Comparable Acquisitions 106


Step V. Determine Valuation 106


Key Pros and Cons 107


Illustrative Precedent Transaction Analysis for ValueCo 108


Step I. Select the Universe of Comparable Acquisitions 108


Step II. Locate the Necessary Deal-Related and Financial Information 108


Step III. Spread Key Statistics, Ratios, and Transaction Multiples 111


Step IV. Benchmark the Comparable Acquisitions 119


Step V. Determine Valuation 121


Bloomberg Appendix 122


Chapter 3 Discounted Cash Flow Analysis 125


Summary of Discounted Cash Flow Analysis Steps 126


Step I. Study the Target and Determine Key Performance Drivers 130


Study the Target 130


Determine Key Performance Drivers 130


Step II. Project Free Cash Flow 131


Considerations for Projecting Free Cash Flow 131


Projection of Sales, EBITDA, and EBIT 133


Projection of Free Cash Flow 135


Step III. Calculate Weighted Average Cost of Capital 141


Step III(a): Determine Target Capital Structure 142


Step III(b): Estimate Cost of Debt (rd) 143


Step III(c): Estimate Cost of Equity (re) 144


Step III(d): Calculate WACC 148


Step IV. Determine Terminal Value 148


Exit Multiple Method 149


Perpetuity Growth Method 149


Step V. Calculate Present Value and Determine Valuation 151


Calculate Present Value 151


Determine Valuation 153


Perform Sensitivity Analysis 155


Key Pros and Cons 156


Illustrative Discounted Cash Flow Analysis for ValueCo 157


Step I. Study the Target and Determine Key Performance Drivers 157


Step II. Project Free Cash Flow 157


Step III. Calculate Weighted Average Cost of Capital 164


Step IV. Determine Terminal Value 169


Step V. Calculate Present Value and Determine Valuation 171


Bloomberg Appendix 176


Part Two Leveraged Buyouts 183


Chapter 4 Leveraged Buyouts 185


Key Participants 187


Financial Sponsors 187


Investment Banks 188


Bank and Institutional Lenders 190


Bond Investors 191


Target Management 191


Characteristics of a Strong LBO Candidate 192


Strong Cash Flow Generation 193


Leading and Defensible Market Positions 193


Growth Opportunities 194


Efficiency Enhancement Opportunities 194


Low Capex Requirements 194


Strong Asset Base 195


Proven Management Team 195


Economics of LBOs 196


Returns Analysis—Internal Rate of Return 196


Returns Analysis—Cash Return 197


How LBOs Generate Returns 197


How Leverage is Used to Enhance Returns 198


Primary Exit/Monetization Strategies 202


Sale of Business 202


Initial Public Offering 203


Dividend Recapitalization 203


Below Par Debt Repurchase 203


LBO Financing: Structure 204


LBO Financing: Primary Sources 207


Bank Debt 207


High Yield Bonds 211


Mezzanine Debt 213


Equity Contribution 214


LBO Financing: Selected Key Terms 217


Security 217


Seniority 217


Maturity 219


Coupon 219


Call Protection 220


Covenants 221


Term Sheets 224


LBO Financing: Determining Financing Structure 227


Bloomberg Appendix 232


Chapter 5 LBO Analysis 235


Financing Structure 235


Valuation 235


Step I. Locate and Analyze the Necessary Information 238


Step II. Build the Pre-LBO Model 238


Step II(a): Build Historical and Projected Income Statement through EBIT 239


Step II(b): Input Opening Balance Sheet and Project Balance Sheet Items 242


Step II(c): Build Cash Flow Statement through Investing Activities 244


Step III. Input Transaction Structure 247


Step III(a): Enter Purchase Price Assumptions 247


Step III(b): Enter Financing Structure into Sources and Uses 249


Step III(c): Link Sources and Uses to Balance Sheet Adjustments Columns 251


Step IV. Complete the Post-LBO Model 256


Step IV(a): Build Debt Schedule 256


Step IV(b): Complete Pro Forma Income Statement from EBIT to Net Income 265


Step IV(c): Complete Pro Forma Balance Sheet 268


Step IV(d): Complete Pro Forma Cash Flow Statement 270


Step V. Perform LBO Analysis 272


Step V(a): Analyze Financing Structure 272


Step V(b): Perform Returns Analysis 274


Step V(c): Determine Valuation 278


Step V(d): Create Transaction Summary Page 279


Illustrative LBO Analysis for ValueCo 280


Bloomberg Appendix 290


Part Three Mergers & Acquisitions 293


Chapter 6 Sell-Side M&A 295


Auctions 296


Auction Structure 299


Organization and Preparation 299


Identify Seller Objectives and Determine Appropriate Sale Process 299


Perform Sell-Side Advisor Due Diligence and Preliminary Valuation Analysis 301


Select Buyer Universe 301


Prepare Marketing Materials 302


Prepare Confidentiality Agreement 305


First Round 306


Contact Prospective Buyers 306


Negotiate and Execute Confidentiality Agreement with Interested Parties 306


Distribute Confidential Information Memorandum and Initial Bid Procedures Letter 306


Prepare Management Presentation 308


Set up Data Room 309


Prepare Stapled Financing Package 311


Receive Initial Bids and Select Buyers to Proceed to Second Round 311


Valuation Perspectives—Strategic Buyers vs. Finacial Sponsors 312


Second Round 313


Conduct Management Presentations 313


Facilitate Site Visits 314


Provide Data Room Access 314


Distribute Final Bid Procedures Letter and Draft Definitive Agreement 315


Receive Final Bids 316


Negotiations 320


Evaluate Final Bids 320


Negotiate with Preferred Buyer(s) 320


Select Winning Bidder 320


Render Fairness Opinion 321


Receive Board Approval and Execute Definitive Agreement 321


Closing 322


Obtain Necessary Approvals 322


Shareholder Approval 322


Financing and Closing 324


Negotiated Sale 325


Bloomberg Appendix 327


Chapter 7 Buy-Side M&A 331


Buyer Motivation 332


Synergies 333


Cost Synergies 334


Revenue Synergies 334


Acquisition Strategies 335


Horizontal Integration 335


Vertical Integration 335


Conglomeration 336


Form of Financing 337


Cash on Hand 338


Debt Financing 338


Equity Financing 339


Debt vs. Equity Financing Summary—Acquirer Perspective 340


Deal Structure 340


Stock Sale 340


Asset Sale 343


Stock Sales Treated as Asset Sales for Tax Purposes 346


Section 338 Election 346


338(h)(10) Election 346


Buy-Side Valuation 348


Football Field 349


Analysis at Various Prices 352


Contribution Analysis 353


Merger Consequences Analysis 355


Purchase Price Assumptions 355


Balance Sheet Effects 360


Accretion/(Dilution) Analysis 365


Acquisition Scenarios—I) 50% Stock / 50% Cash; II) 100% Cash; and III) 100% Stock 368


Illustrative Merger Consequences Analysis for the BuyerCo / ValueCo Transaction 373


Bloomberg Appendix 394


Afterword 397


Bibliography and Recommended Reading 399


Index 405

About the Author

Joshua Rosenbaum is a Managing Director at UBS Investment Bank in the Global Industrial Group. He originates, structures, and advises on M&A, corporate finance, and capital markets transactions. Previously, he worked at the International Finance Corporation, the direct investment division of the World Bank. He received his AB from Harvard and his MBA with Baker Scholar honors from Harvard Business School. Joshua Pearl is an investment analyst at Brahman Capital Corp. Previously, he structured and executed leveraged loan and high yield bond financings, as well as leveraged buyouts and restructurings as a Director at UBS Investment Bank in Leveraged Finance. Prior to UBS, he worked at Moelis & Company and Deutsche Bank. He received his BS in Business from Indiana University's Kelley School of Business.