merger vs LBO model
Which of the following statements are TRUE regarding the DIFFERENCES in the pro-forma Balance Sheet
adjustments in an lbo model vs. the adjustments in a merger model?
a. Under Long-Term Liabilities, there are likely to be more debt tranches in an LBO model than there are in
a merger model.
b. The formula for calculating newly created Goodwill is different in an LBO model, because with an LBO a
shell corporation created by the PE firm purchases the company.
c. In a merger model, the target company’s existing Shareholder’s Equity balance is reset to $0, whereas in
an LBO model the company’s existing Shareholders’ Equity is added to the “Common Equity
Contribution from Financial Sponsor” line item.
d. In a merger model, you’re likely to modify the Cash & Cash-Equivalents number on the Balance Sheet,
but in an LBO model this is uncommon since cash does not change in the transaction.
e. In a merger model, you may adjust for items like inter-company Accounts Receivable and inter-company
Accounts Payable to eliminate redundant entries, but in an LBO model you would not make these
adjustments since the company is not being acquired by another “real” company.
I'm convinced OP is Money Money Money
B.
a
LBO vs Merger model (Originally Posted: 09/03/2015)
Hi fellow monkeys,
I hope you can liberate me from the pain of countless hours spent looking for an answer in vain:
What model does a financial sponsor use when considering a bolt-on/roll-up acquisition?
I am thinking of a situation where the PE firm has already made the acquisition of the platform company, and is now looking at a potential target.
-is it a proverbial LBO with built-in synergies; if yes, how do you separate the returns from the target from the returns of the platform? -or some sort of merger model.
I am leaning towards the LBO, but have no idea how to do it in that case. I still have a few days to prepare for a modeling test at a platform company of a large PE firm, so any help or link towards appropriate resources is greatly appreciated.
Thanks!
You can use both. You'd have the model for the parent, then you'd just layer in the purchase price (as guided by your LBO or merger model) as a cash outflow (either at the fund level via capital call or from the parent co's cash/whatever other financing) and combine operations. If you overpay, then you'll end up decreasing returns for the overall investment (compared to not buying the target), and if you underpay (i.e. you get a good deal), you'll increase returns.
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