is it ok to Leave out Future Acquisitions in a model?
Should assume future acquisitions in a model I’m showing to ER and IB professionals who request a work sample? Or leave them out since in theory they only add value if there are synergies, which I'm guessing would be a bitch to model…
Could I maybe assume all cash purchases, then divide the cost 30% to goodwill and 70% to PP&E, then add the PP&E to my depreciation schedule? Calculating the increase in rev/opex would be near impossible since I’m just using margin assumptions, and not a full rev/exp build…. So, maybe I could create an acquisition schedule as I described, BUT leave the acquisition inputs at $0 while keeping the schedule in the model to “show off” its robustness? OR would they thinks that is too crude, and proceed to grill me on the minutia of acquisition accounting which I clearly don’t know well…What would you do?
Fyi it's a hospital company, so PP&E+Goodwill is near 70% of assets, and they've been spending about 50% of CFops on PP&E purchases and another 25% on acquisitions.
Thanks.
No, I would not assume theoretical M&A in a model.
When a Company announces a deal, ER analyst (most of the time) won't include that deal in their numbers until it closes. This is mostly because deals fall apart or closing can be delayed, and it'd be messy to have consensus estimates move up, then shift out to the right or come back down.
Even when a Company has specifically stated LT goals that include M&A, I leave it out - you can't give credit to a management team for doing accretive deals until they've found a willing seller at a fair price.
The only exception for me has been when the story is M&A. XPO for example, started as a small logistics biz but a new CEO came on with a ton of his own funding with the plan to make x number of acquisitions per year and grow to Y in revenues.
Now, if I was pitching to M&A IB and wanted to show that I could run a merger model, then the entire point is to show that you know the impacts to the three statements and that you can run sensitivities. You can find good samples online that'll show you how to do so, but make sure you understand the accounting before you put it in front of someone.
And fyi, for now, the model I'm making is just a DCF/comparable companies valuation so it can "go both ways" as an ER and IB work sample.
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