Instructor and Student 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 Chapter 1 Questions 75 Bloomberg Appendix 79 Chapter 2 Precedent Transactions Analysis 87 Summary of Precedent Transactions Analysis Steps 88 Step I. Select the Universe of Comparable Acquisitions 91 Screen for Comparable Acquisitions 91 Examine Other Considerations 92 Step II. Locate the Necessary Deal-Related and Financial Information 94 Public Targets 94 Private Targets 97 Summary of Primary SEC Filings in M&A Transactions 97 Step III. Spread Key Statistics, Ratios, and Transaction Multiples 100 Calculation of Key Financial Statistics and Ratios 100 Calculation of Key Transaction Multiples 106 Step IV. Benchmark the Comparable Acquisitions 110 Step V. Determine Valuation 110 Key Pros And Cons 111 Illustrative Precedent Transaction Analysis for ValueCo 112 Step I. Select the Universe of Comparable Acquisitions 112 Step II. Locate the Necessary Deal-Related and Financial Information 112 Step III. Spread Key Statistics, Ratios, and Transaction Multiples 115 Step IV. Benchmark the Comparable Acquisitions 123 Step V. Determine Valuation 125 Chapter 2 Questions 126 Bloomberg Appendix 131 Chapter 3 Discounted Cash Flow Analysis 135 Summary of Discounted Cash Flow Analysis Steps 136 Step I. Study the Target and Determine Key Performance Drivers 140 Study the Target 140 Determine Key Performance Drivers 140 Step II. Project Free Cash Flow 141 Considerations for Projecting Free Cash Flow 141 Projection of Sales, EBITDA, and EBIT 143 Projection of Free Cash Flow 145 Step III. Calculate Weighted Average Cost of Capital 151 Step III(a): Determine Target Capital Structure 152 Step III(b): Estimate Cost of Debt (rd) 153 Step III(c): Estimate Cost of Equity (re) 154 Step III(d): Calculate WACC 158 Step IV. Determine Terminal Value 158 Exit Multiple Method 159 Perpetuity Growth Method 159 Step V. Calculate Present Value and Determine Valuation 161 Calculate Present Value 161 Determine Valuation 163 Perform Sensitivity Analysis 165 Key Pros and Cons 166 Illustrative Discounted Cash Flow Analysis for ValueCo 167 Step I. Study the Target and Determine Key Performance Drivers 167 Step II. Project Free Cash Flow 167 Step III. Calculate Weighted Average Cost of Capital 174 Step IV. Determine Terminal Value 179 Step V. Calculate Present Value and Determine Valuation 181 Chapter 3 Questions 186 Bloomberg Appendix 191 Part Two Leveraged Buyouts 197 Chapter 4 Leveraged Buyouts 199 Key Participants 201 Financial Sponsors 201 Investment Banks 202 Bank and Institutional Lenders 204 Bond Investors 205 Target Management 205 Characteristics of a Strong LBO Candidate 206 Strong Cash Flow Generation 207 Leading and Defensible Market Positions 207 Growth Opportunities 208 Efficiency Enhancement Opportunities 208 Low Capex Requirements 208 Strong Asset Base 209 Proven Management Team 209 Economics of LBOs 210 Returns Analysis-Internal Rate of Return 210 Returns Analysis-Cash Return 211 How LBOs Generate Returns 211 How Leverage Is Used to Enhance Returns 212 Primary Exit/Monetization Strategies 216 Sale of Business 216 Initial Public Offering 217 Dividend Recapitalization 217 Below Par Debt Repurchase 217 LBO Financing: Structure 218 LBO Financing: Primary Sources 221 Bank Debt 221 High Yield Bonds 225 Mezzanine Debt 227 Equity Contribution 228 LBO Financing: Selected Key Terms 231 Security 231 Seniority 231 Maturity 233 Coupon 233 Call Protection 234 Covenants 235 Term Sheets 238 LBO Financing: Determining Financing Structure 241 Chapter 4 Questions 246 Bloomberg Appendix 249 Chapter 5 LBO Analysis 251 Financing Structure 251 Valuation 251 Step I. Locate and Analyze the Necessary Information 254 Step II. Build the Pre-LBO Model 254 Step II(a): Build Historical and Projected Income Statement through EBIT 255 Step II(b): Input Opening Balance Sheet and Project Balance Sheet Items 258 Step II(c): Build Cash Flow Statement through Investing Activities 260 Step III. Input Transaction Structure 263 Step III(a): Enter Purchase Price Assumptions 263 Step III(b): Enter Financing Structure into Sources and Uses 265 Step III(c): Link Sources and Uses to Balance Sheet Adjustments Columns 267 Step IV. Complete the Post-LBO Model 272 Step IV(a): Build Debt Schedule 272 Step IV(b): Complete Pro Forma Income Statement from EBIT to Net Income 281 Step IV(c): Complete Pro Forma Balance Sheet 284 Step IV(d): Complete Pro Forma Cash Flow Statement 286 Step V. Perform LBO Analysis 288 Step V(a): Analyze Financing Structure 288 Step V(b): Perform Returns Analysis 290 Step V(c): Determine Valuation 294 Step V(d): Create Transaction Summary Page 295 Illustrative LBO Analysis for ValueCo 296 Chapter 5 Questions 306 Bloomberg Appendix 311 Part Three Mergers & Acquisitions 313 Chapter 6 Sell-Side M&A 315 Auctions 316 Auction Structure 319 Organization and Preparation 319 Identify Seller Objectives and Determine Appropriate Sale Process 319 Perform Sell-Side Advisor Due Diligence and Preliminary Valuation Analysis 321 Select Buyer Universe 321 Prepare Marketing Materials 322 Prepare Confidentiality Agreement 325 First Round 326 Contact Prospective Buyers 326 Negotiate and Execute Confidentiality Agreement with Interested Parties 326 Distribute Confidential Information Memorandum and Initial Bid Procedures Letter 326 Prepare Management Presentation 328 Set up Data Room 329 Prepare Stapled Financing Package 331 Receive Initial Bids and Select Buyers to Proceed to Second Round 331 Valuation Perspectives-Strategic Buyers vs. Finacial Sponsors 332 Second Round 333 Conduct Management Presentations 333 Facilitate Site Visits 334 Provide Data Room Access 334 Distribute Final Bid Procedures Letter and Draft Definitive Agreement 335 Receive Final Bids 336 Negotiations 340 Evaluate Final Bids 340 Negotiate with Preferred Buyer(s) 340 Select Winning Bidder 340 Render Fairness Opinion 341 Receive Board Approval and Execute Definitive Agreement 341 Closing 342 Obtain Necessary Approvals 342 Shareholder Approval 342 Financing and Closing 344 Negotiated Sale 345 Chapter 6 Questions 347 Bloomberg Appendix 351 Chapter 7 Buy-Side M&A 355 Buyer Motivation 356 Synergies 357 Cost Synergies 358 Revenue Synergies 358 Acquisition Strategies 359 Horizontal Integration 359 Vertical Integration 359 Conglomeration 360 Form of Financing 361 Cash on Hand 362 Debt Financing 362 Equity Financing 363 Debt vs. Equity Financing Summary-Acquirer Perspective 364 Deal Structure 364 Stock Sale 364 Asset Sale 367 Stock Sales Treated as Asset Sales for Tax Purposes 370 Section 338 Election 370 338(h)(10) Election 370 Buy-Side Valuation 372 Football Field 373 Analysis at Various Prices 376 Contribution Analysis 377 Merger Consequences Analysis 379 Purchase Price Assumptions 379 Balance Sheet Effects 384 Accretion/(Dilution) Analysis 389 Acquisition Scenarios-I) 50% Stock / 50% Cash; II) 100% Cash; and III) 100% Stock 392 Illustrative Merger Consequences Analysis for the BuyerCo / ValueCo Transaction 397 Chapter 7 Questions 418 Bloomberg Appendix 423 Solutions to Selected Questions 425 Afterword 435 Bibliography and Recommended Reading 437 Index 443
Joshua N. Rosenbaum (New York, NY) is an Executive Director in UBS Investment Bank's Global Industrials Group. He received his BA from Harvard University and his MBA, with Baker Scholar honors, from the Harvard Business School. Joshua D. Pearl (New York, NY) is currently at UBS Investment Bank's Global Industrials Group. He was previously an Associate in Deutsche Bank's Leveraged Finance Group, where he was also previously an Analyst. He received his BS in Business Administration from Indiana University's Kelley School of Business.