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.
|
Ask a Question About this Product More... |
|
