Preeti Chaudhary Thanks for watching! Yes, this one moved quite quickly. We're generally slowing down the pace of videos if you look at how they've changed over time.
Great!! Two questions: 1 - Why does the synergy amount in sales enter without any associated COGSor increase in SG&A? It’s injected straight as pre-tax income this way. 2 - Why use buyers tax rate on entire combined sales?
1) It's a simplified case study. A more complex one would include associated costs. 2) Because the seller stops existing as a separate entity once the deal is complete, so the buyer's tax rate applies.
One thing is that the leverage ratios do change even under an equity only stock purchase, not sure why there was no movement here. Only time they wouldn’t change in from Standalone to Proforma is if they had the exact same ratios or due to rounding given size discrepancy or if exactly the right amount of debt was issued during the acquisition to balance the proforma ratios back to Standalone.
How is that relevant to the questions asked in this simplified, 30-minute case study? If you're saying that the interest rates should change in real life because the leverage ratios and other credit stats/ratios will change, yes, sure, but this is a speed test where the goal is to follow the instructions and finish quickly.
@@financialmodeling Hi, Bryan, I have the same issue. And the tab is closed automatically as well. Is the title similar in youtube and M&I? I can try to find it manually in your website. Thank you
Hi Brian! Thanks for the video. I've got a question concerning the Cash Flow Statement in merger models. I noticed that in your videos you show us how to adjust/combine the IS and BS for these situations. How about the CFS? How do we combine/adjust and project them for the NewCo? Do we just add up the CFs of the companies that went through the M&A (assuming they were previously projected)? How do we match up the adjustments made in the BS with the CFS? Thanks!
We cover this topic extensively in the BIWS courses. This is a free channel where I occasionally post samples and excerpts. Adding together the Cash Flow Statements is the same as adding together the Income Statements, add the line items and adjust for the various new items that may get created in the deal (new D&A, restructuring/integration costs, principal repayments on new debt, etc.).
Try the direct links: youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com/108-04-Merger-Model-AC-Case-Study-Before.xlsx youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com/108-04-Merger-Model-AC-Case-Study-After.xlsx
Hi Brian, thanks for the video. I've got two questions: 1/ For the combined net income, why don't you use the buyer's tax rate for Company B? 2/ When calculating EBITDA, why don't you apply an EBITDA margin for revenue synergies? Thanks !
1) In a merger model, you combine the pre-tax incomes of both companies, adjust for acquisition effects, and then tax the combined pre-tax income at the buyer's tax rate because the buyer is the surviving entity. 2) We were given no information on the margins for synergies, so we are assuming there are no associated expenses. Is this realistic? No. But it's also a 30-minute speed test that's designed to test your ability to make the basic calculations.
Why is there so much emphasis on the Post merger EPS in merger models instead of FCF's. In my undergrad I built a separate DCF for the Merged entity and valued it at a new WACC with synergies . How does that compare to this accretion/ dilution analysis ?
You can use your method to evaluate mergers and acquisitions as well, but it takes a lot more time and effort and isn't a likely interview/case study topic, so we don't focus on it. Companies heavily emphasis EPS accretion/dilution because the Boards of most public companies want to avoid EPS dilution in deals, so it can be tough to win approval for short-term dilutive deals, even if you argue that they add value in the long term.
May be I am wrong, I think it is b/c investor cares more about the return on equity (their investment) rather than how the EV may change. The EV can go up (assuming that the new WACC does not deviate much from the pre - merger WACC); but the equity value may be not up proportionally due to in the increase in Debt. In the end, investor cares about return, the EV will not matter them until they sell their company
I don't know, but the videos here are designed to be "free samples," not comprehensive bottoms-up courses. So yes, you may need some background information ifrst.
great video - thanks a lot! Why do you just calculate the mcap times (1+premium) for the purchase price. I thought u always have to pay the enterprise value? so mcap(1+premium)+net debt... Thanks a lot if you can offer some help here
Thank you! How would you rate the difficulty of this model out of 10 for an AC case study today? Would such a case study still be representative of the ones asked today or have the requirements changed?
Case studies like this are still given today. On a difficulty scale, I would say maybe a 5 / 10, mostly because of the time pressure. Without the time pressure, it's fairly easy because there are no complex formulas or other Excel setup required. It's similar to many standardized tests (difficult mostly due to time pressure).
It takes time to realize synergies. A company can't fire half its employees overnight or close 50% of its branches in one year; it might take years to realize that plan, outsource certain services, etc. Companies always assume that it takes time to realize synergies in a deal.
Hey, could you answer me a question. How could the rate to raise debt is 8.25%? why do we add libor to 500 points? I know it is just assumption but isn't the debt rate too high based on common sense
These are just the assumptions that were provided. In today's environment, yes, this rate is probably too high, but banks tend to use and re-use case studies and modeling exercises over the years.
Thank you for the nice video! A quick question - what's the 5% of target sales? Is that the target company's revenue growth rate? How to get the % of target sales in the real world case? Is that 3.25% of the target company's cost of debt?
5% of target sales is the assumption for revenue synergies here. No, it's not the revenue growth rate. In real life, you would have to research both companies, their respective markets, and come up with a reasonable estimate for the synergies that might be realized via up-sells, cross-sells, new channels, etc. 3.25% is the assumed prevailing interest rate, LIBOR here.
Great video thanks for sharing!!! I have a question concerning the purchase price. You use the market cap in the video to calculate the purchase price. In reality, should market cap be used or should enterprise value be used?
+Edwin Chan You always start with the Market Cap and then adjust from there based on the treatment of cash and debt... Enterprise Value does *not* necessarily indicate the amount paid for a company in real life. It's just an estimate, and the concept behind Enterprise Value actually relates to something else entirely (the value of the core business operating assets to all investors in the company). In many cases, Enterprise Value will be closer to the actual amount paid, but it varies based on the deal terms. But you always start by assuming that the buyer acquires all the common shares of the seller.
One question, not really clear how mix works. In other words if we attract cash by raising debt we use it to buy shares of target ( at least how i was taught so) , then number of shares of acquirer should consist of original number of shares plus issued shared plus shared which are bought ( portion of some target shares), which was not the case in the video. Thank you in advance.
If the buyer gets cash by raising Debt, that counts as a Debt issuance. The total number of shares in a 100% Debt deal will equal the buyer's shares from before the deal took place because the seller's shares go away. New shares get created only if the buyer issues stock to do the deal.
This is probably the best TH-cam channel for investment banking tutorials!
Cheers
Thanks for watching!
Great presentation. I could actually comprehend each and every detail that you have shared. Good work. Please come up with more such videos.
Preeti Chaudhary Thanks for watching! Yes, this one moved quite quickly. We're generally slowing down the pace of videos if you look at how they've changed over time.
Very good and on point content
Thanks for watching!
Really enjoy your course! Thanks so much!
Thanks for watching!
Great!! Two questions:
1 - Why does the synergy amount in sales enter without any associated COGSor increase in SG&A? It’s injected straight as pre-tax income this way.
2 - Why use buyers tax rate on entire combined sales?
1) It's a simplified case study. A more complex one would include associated costs.
2) Because the seller stops existing as a separate entity once the deal is complete, so the buyer's tax rate applies.
Appreciate the video Brian! The links for the the excel files do not seem to work, any chance they can be reuploaded?
youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com/108-04-Merger-Model-AC-Case-Study-After.xlsx
youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com/108-04-Merger-Model-AC-Case-Study-Before.xlsx
One thing is that the leverage ratios do change even under an equity only stock purchase, not sure why there was no movement here. Only time they wouldn’t change in from Standalone to Proforma is if they had the exact same ratios or due to rounding given size discrepancy or if exactly the right amount of debt was issued during the acquisition to balance the proforma ratios back to Standalone.
How is that relevant to the questions asked in this simplified, 30-minute case study? If you're saying that the interest rates should change in real life because the leverage ratios and other credit stats/ratios will change, yes, sure, but this is a speed test where the goal is to follow the instructions and finish quickly.
Great video. Really insightful.. Thanks
+Yogesh Jaiswal Thanks for watching
hey bryan thanks for doing this. the links to the excel models dont seem to be working. can you please reupload them?
I just tried the links, and they seemed to work... maybe try the direct URLs and remove the parts that TH-cam adds at the end?
@@financialmodeling Hi, Bryan, I have the same issue. And the tab is closed automatically as well. Is the title similar in youtube and M&I? I can try to find it manually in your website. Thank you
@@Handi_W You can search for Dell LBO on the site. The URLs should be the same.
Hi Brian! Thanks for the video.
I've got a question concerning the Cash Flow Statement in merger models. I noticed that in your videos you show us how to adjust/combine the IS and BS for these situations. How about the CFS? How do we combine/adjust and project them for the NewCo? Do we just add up the CFs of the companies that went through the M&A (assuming they were previously projected)? How do we match up the adjustments made in the BS with the CFS? Thanks!
We cover this topic extensively in the BIWS courses. This is a free channel where I occasionally post samples and excerpts. Adding together the Cash Flow Statements is the same as adding together the Income Statements, add the line items and adjust for the various new items that may get created in the deal (new D&A, restructuring/integration costs, principal repayments on new debt, etc.).
Great video - but the link to download the excel file is broken!
Try the direct links:
youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com/108-04-Merger-Model-AC-Case-Study-Before.xlsx
youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com/108-04-Merger-Model-AC-Case-Study-After.xlsx
Hi Brian, thanks for the video. I've got two questions: 1/ For the combined net income, why don't you use the buyer's tax rate for Company B? 2/ When calculating EBITDA, why don't you apply an EBITDA margin for revenue synergies? Thanks !
1) In a merger model, you combine the pre-tax incomes of both companies, adjust for acquisition effects, and then tax the combined pre-tax income at the buyer's tax rate because the buyer is the surviving entity. 2) We were given no information on the margins for synergies, so we are assuming there are no associated expenses. Is this realistic? No. But it's also a 30-minute speed test that's designed to test your ability to make the basic calculations.
Thanks for the vedio looking out for some more vedios
Thanks for watching!
Very good demonstration. Can we have a copy of the Excel version?
Click "Show More" and then click the links there.
Why is there so much emphasis on the Post merger EPS in merger models instead of FCF's. In my undergrad I built a separate DCF for the Merged entity and valued it at a new WACC with synergies . How does that compare to this accretion/ dilution analysis ?
You can use your method to evaluate mergers and acquisitions as well, but it takes a lot more time and effort and isn't a likely interview/case study topic, so we don't focus on it. Companies heavily emphasis EPS accretion/dilution because the Boards of most public companies want to avoid EPS dilution in deals, so it can be tough to win approval for short-term dilutive deals, even if you argue that they add value in the long term.
May be I am wrong, I think it is b/c investor cares more about the return on equity (their investment) rather than how the EV may change. The EV can go up (assuming that the new WACC does not deviate much from the pre - merger WACC); but the equity value may be not up proportionally due to in the increase in Debt. In the end, investor cares about return, the EV will not matter them until they sell their company
I don’t understand most of things that goes on over here. Should I watch any video before this one from your channel?
I don't know, but the videos here are designed to be "free samples," not comprehensive bottoms-up courses. So yes, you may need some background information ifrst.
great video - thanks a lot!
Why do you just calculate the mcap times (1+premium) for the purchase price. I thought u always have to pay the enterprise value? so mcap(1+premium)+net debt... Thanks a lot if you can offer some help here
No. See the lesson on the true purchase price in M&A deals.
Thank you! How would you rate the difficulty of this model out of 10 for an AC case study today? Would such a case study still be representative of the ones asked today or have the requirements changed?
Case studies like this are still given today. On a difficulty scale, I would say maybe a 5 / 10, mostly because of the time pressure. Without the time pressure, it's fairly easy because there are no complex formulas or other Excel setup required. It's similar to many standardized tests (difficult mostly due to time pressure).
The links for downloading excel files are not working. Can you provide these excel files?
youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com/108-04-Merger-Model-AC-Case-Study-After.xlsx
youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com/108-04-Merger-Model-AC-Case-Study-Before.xlsx
youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com/108-04-Merger-Model-Assessment-Center-Case-Study.pdf
What is Synergy Phase-In? How should I interpret this in actual business context? Why does it go from 25% to 100%?
It takes time to realize synergies. A company can't fire half its employees overnight or close 50% of its branches in one year; it might take years to realize that plan, outsource certain services, etc. Companies always assume that it takes time to realize synergies in a deal.
Understood. Thank you for the clarification!
Hey, could you answer me a question. How could the rate to raise debt is 8.25%? why do we add libor to 500 points? I know it is just assumption but isn't the debt rate too high based on common sense
These are just the assumptions that were provided. In today's environment, yes, this rate is probably too high, but banks tend to use and re-use case studies and modeling exercises over the years.
One question Brian, In the M&A analysis , should we use the consolidated or unconsolidated financial statements of buyer and seller ? And why ?
Consolidated because you want to examine the impact on the parent company as a whole, not just one or several subsidiaries.
Thank you for the nice video! A quick question - what's the 5% of target sales? Is that the target company's revenue growth rate? How to get the % of target sales in the real world case? Is that 3.25% of the target company's cost of debt?
5% of target sales is the assumption for revenue synergies here. No, it's not the revenue growth rate. In real life, you would have to research both companies, their respective markets, and come up with a reasonable estimate for the synergies that might be realized via up-sells, cross-sells, new channels, etc. 3.25% is the assumed prevailing interest rate, LIBOR here.
Hello how do we get access to the models please
Click "Show More" and scroll down to click the links.
Hi Team! I tried to download the files but the links in the description box are not working for me.
youtube-breakingintowallstreet-com.s3.amazonaws.com/108-04-Merger-Model-AC-Case-Study-Before.xlsx
youtube-breakingintowallstreet-com.s3.amazonaws.com/108-04-Merger-Model-AC-Case-Study-After.xlsx
youtube-breakingintowallstreet-com.s3.amazonaws.com/108-04-Merger-Model-Assessment-Center-Case-Study.pdf
Great video thanks for sharing!!! I have a question concerning the purchase price. You use the market cap in the video to calculate the purchase price. In reality, should market cap be used or should enterprise value be used?
+Edwin Chan You always start with the Market Cap and then adjust from there based on the treatment of cash and debt... Enterprise Value does *not* necessarily indicate the amount paid for a company in real life. It's just an estimate, and the concept behind Enterprise Value actually relates to something else entirely (the value of the core business operating assets to all investors in the company). In many cases, Enterprise Value will be closer to the actual amount paid, but it varies based on the deal terms. But you always start by assuming that the buyer acquires all the common shares of the seller.
One question, not really clear how mix works. In other words if we attract cash by raising debt we use it to buy shares of target ( at least how i was taught so) , then number of shares of acquirer should consist of original number of shares plus issued shared plus shared which are bought ( portion of some target shares), which was not the case in the video. Thank you in advance.
If the buyer gets cash by raising Debt, that counts as a Debt issuance. The total number of shares in a 100% Debt deal will equal the buyer's shares from before the deal took place because the seller's shares go away. New shares get created only if the buyer issues stock to do the deal.
Great Video, thanks! could you please explain how you made excel add the "x"-sign behind your numbers (for instance at 16:17).
+Alex Custom number formats in Excel... go to Ctrl + 1 and then Custom at the bottom of the left-hand side.
+Mergers & Inquisitions / Breaking Into Wall Street Thanks a lot!
life saver
Thanks for watching!
Good
Thanks for watching!
thanks share