Merger of Equal Modeling
Does anyone have experience in merger of equals modeling? I understand that you add up each line item on the IS and BS. Is that all there is to it.
Company A has an EBITDA of $10mm
Company B has an EBITDA of $5mm
Selling price is at 6.0x.
Does Company B, which is a public company need to raise equity to have the same valuation.
Please help me with the mechanics.
Thanks
Well I am assuming you are just talking about regular M&A modeling .... depends on what your sources and uses are:
Typcial sources of funds are cash on hand, target cash, new debt and issuing equity. Typical uses are purchase target equity, retire debt and fees. MOE modeling usually assumes that the buyer will pay for the other company almost all in stock (or at least the pitches / deals i have worked on).
You have to adjust the balance sheet for purchase price accounting. You have to adjust the Income statement for interest expense, tax adjustments and synergies. EBITDA would be important if you are making leverage assumptions.
If both companies have the same EBITDA multiple than company B is worth half (assuming no cash/debt) than company A. Hope that was somewhat helpful. Not sure exactly what you are asking.
Merger Modeling Question (Originally Posted: 03/21/2014)
I'm going to be working on modeling a potential merger between one of our portfolio companies and a competitor, about equal size. In terms of combining the financials, is there anything crucial that I need to know that would be different than say, a bolt-on acquisition of a smaller company?
Can you be more specific?
I cannot think of anything offhand. Usually the math gets tricky with acquisitions of larger companies (comparatively) because you usually have a mix of consideration instead of an all-cash purchase. In an all-cash, you just have to account for additional interest expense on the debt you issue above balance sheet cash. Once you have equity consideration, you get into exchange ratios, collars, etc. in addition to additional debt and how it effects accretion/dilution. In both cases, you also have to figure in asset write-ups for pro forma PPE and depreciation.
I suppose I was just referring to preparation of the consolidated historic/pro forma financials. Bolt-on's are usually pretty straight forward in that regard as to where potential synergies are. Then again now that I think about it it's probably the same thing in how you combine the financials, just a little more involved.
I would suggest going through the merger model on macabacus.com if you haven't already. It's very detailed.
Thanks for the rec, didn't even realize they had a merger model!
Question, how are you in PE and don't know how to do a (rather basic) merger model? No offense intended.
Valid question. I know how to run a model; the thread title is a misnomer. I've never modeled a merger between two similarly-sized companies before so I didn't know if there was anything different than modeling out an add-on acquisition that I had to keep in mind, in terms of combining the company financials and making adjustments.
Also, my post history will confirm this, but I got into PE by basically having one of the partners (now my boss) do me a favor and bring me on to learn. I already knew how to run the models but didn't have any prior professional deal experience.
Quick merger question (Originally Posted: 11/05/2009)
In a supposedly equal merger of company A and B (no goodwill), it is given (among others): 1) the name of the new company is that of co. A 2) shareholders of company A receive 0.925 shares of the new company for 1 share of old company A, while shareholders of co. B receive 1 share of the new company for 1 share of old co. B
Who is considered the buyer/seller in this transaction? Or can that not be said?
B is the buyer, A is the seller
Could you elaborate?
Company B shareholders are receiving 1:1 for their shares so they can't be the target company. Company A shareholders are receiving a conversion ratio of their shares into Company B shares (new company).
I agree with kingtut, Co B is the buyer and A is seller. I believe the whole thing about the new company having the name of Company A is just to trick you.
Thanks guys.
you guys are good
Hello, I agree with the other guys said above company B is the buyer and company A is the seller.
Thanks regards......
Well you guys are correct in the end, but the logic is incorrect. The fact that A loses its name results in B being the buyer. The reason is that legally, in a merger, there is only one surviving entity. Usually the entity that pursues the txn and would be considered the buyer is the one that keeps the name/copyrights in the survival.
Just because B is a bigger company or something does not mean it is the buyer. There have been multiple times in the past where a buyer who was smaller than a target merged successfully.
Except..
How do you calculate a merger ratio for 2 private companies? (Originally Posted: 03/06/2016)
Say we have 2 private companies A and B.
A and B want to merge and do it via the following structure: NewCo is created; and A and B become subsidiaries of NewCo.
How do you calculate the ratio for shareholding in NewCo for the shareholders of A and B?
Hypothetical add on question: Suppose A and B are equal in value and therefore there is 50/50 shareholding. A has $10m cash and B and 0 cash, once the merger has been completed and NewCo created, do the shareholders of B have entitlement to 50% of the cash in A now?
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