All-stock M&A deal: what's combined market map?

In all-stock acquisitions for two public co's, what happens to the market cap of the combined new co?

I'm not talking about what happens when the deal is announced - acquirer's stock goes down, target stock goes up (generally). I'm asking specifically about post-deal close and the acquirer's stock is issued to target's shareholders.

Comments (11)

May 12, 2015

In an all stock deal, PF Market Cap A = Market Cap A + Market Cap T + PV of synergies

May 20, 2015

In an all stock deal, PF Market Cap A = Market Cap A + Market Cap T + PV of synergies

Not to nit, but the synergies would also be tax-adjusted using the target's marginal tax rate, if I'm not mistaken. Also, be sure to use Market Cap T calculated using the offer price. Correct me if I'm wrong here.

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Aug 7, 2016

if this were a deal with no stock involved, would the PF Market Cap A only be Market Cap A + PV of synergies? thanks!

Aug 7, 2016

and would this actually be PF Market Cap A = Market Cap A + EV of T + PV of synergies?

My understanding is that A used all stock to purchase the entire enterprise value of T, meaning that all of that EV should now be considered as market cap since company A used stock to purchase company T?

May 20, 2015

Mechanically, the above makes sense to me. In practice, I cannot say I have ever seen it shown this way. Based on my experience, a pro forma combined market cap in a 100% stock transaction is usually being shown to demonstrate some kind of value creation to shareholders, i.e. C is greater than A + B. Two ways this value creation can occur is through synergies (captured by pro-forma EPS) and multiple re-rating from the market. The latter involves looking at your pro forma EPS at some point in the future (can be immediate or years ahead) and applying a P/E multiple (hopefully, one that is higher than what the company currently trades at) to get an implied share price. Multiply this implied share price (you may want to discount back to present using the company's cost of equity) by your pro forma shares to get an implied market cap value. The delta between the present value of this implied market cap and your current acquiror market cap is your value creation/destruction.

Apologies if you weren't asking for this. Just thought I would throw in my 2 cents on how I have actually seen something similar done in practice rather than just a textbook formula.

May 21, 2015

@DiggsRTC" - Yes, that's correct on tax affected. However, the Market Cap T actually should not be for the offer price. Offer price is the % of PV of synergies you are willing to forego to get the opportunity to do the deal. If you over pay (ie $ premium is greater than PV of tax affected synergies), deal should be value destructive to current shareholders. If you use the offer price, you are double counting a portion of the synergies. Technically you could restate as:

PF Market Cap A = Market Cap A + Market Cap T (pre-offer price) + PV of (tax affected) synergies
PV of (tax affected) synergies = Offer Premium to T + Value Created for Current A S/H
PF Market Cap A = Market Cap A + Market Cap T (offer price) + Value Created for Current A S/H

@GreekRX" - I've heard people use this method and I think it's slightly misleading. First, assume M&A with no synergies. Company A has PE of 10x, and Company T has PE of 8x. Without synergies PF company should trade somewhere between 10 and 8x. A multiple re-rate should only occur if value is created through synergies.

Example (assume no debt for simplicity):
Market Cap A = $200
Net Income A = $20 (P/E 10x)
Market Cap T = $100
Net Income T = $12.5 (P/E 8x)

(Key assumption: without creating value through synergies, the PF Market Cap should be the same).
PF Market Cap A = $300
PF Net Income = $32.5

PF P/E = (300/32.5) = 9.2x - note, between 10x and 8x, closer to 10x because A is larger

I've heard people try to justify something like the PF company should trade at it's previous P/E multiple (the 10x). This implies that any EPS accretion translates into a proportional % share value accretion. However, I think some people will tell you that even though buying low multiple businesses is Accretive, accretion is sort of meaningless. There's often a reason low multiple businesses trade at low multiples.

The only reason to buy something is not because it's low multiple or potentially Accretive. The only reason to buy something is because you think you can extract more value / run it better than it's current owners. A shitty business doesn't just re-rate because it's acquired by a better, higher multiple business.

I feel like these assumptions are highly debatable. These are all just frameworks for how to think about shareholder value. To be completely honest, I don't think anyone thinks any of these methods are super compelling.

IMHO. Would appreciate any criticism or feedback.

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May 21, 2015

Agree with Diggs on practice vs textbook.

While you might think it is misleading, that's how we do it. PF EPS and a blended P/E multiple to derive PF market cap post-synergies aka post-"value creation"

May 21, 2015