Comments (7)

Aug 1, 2013

Rolling up the whole industry?

Just use regular Acc./Dil. model for the acquisitions

'Before you enter... be willing to pay the price'

Aug 1, 2013

LBO model using acquisitions. Pretty standard.

Aug 1, 2013
peinvestor2012:

LBO model using acquisitions. Pretty standard.

Not trying to be a douche, but I think I'm missing something b/c I said Acc./Dil. - would you mind explaining at a high level why LBO vs. Acc./Dil.?

'Before you enter... be willing to pay the price'

Aug 1, 2013
BepBep12:
peinvestor2012:

LBO model using acquisitions. Pretty standard.

Not trying to be a douche, but I think I'm missing something b/c I said Acc./Dil. - would you mind explaining at a high level why LBO vs. Acc./Dil.?

Private equity firms usually engage in rollups, not strategic buyers. I think that peinvestor is making this assumption.

Aug 1, 2013

PE Perspective:
You should start with an LBO, since that is how you are acquiring the initial platform company.

Then, in your going-forward projections, you have the P&L and CFs of the platform. For each target acquisition, modify the cash flows for the amount that is internally financed and add in the interest expense for any new debt that is taken on. Then add the financials from the target beginning from the date where you expect the transaction to close. Do that for each potential acquisition.

Then, you should have consolidated financial statements that include the platform and all acquired targets. Assume an exit multiple off the consolidated EBITDA and calc your return.

Strategic Perspective (I'm taking a crack at this based on intuition, but haven't had to do a rollup for a strategic. This is how I would approach this):
You have the acquirer's standalone financials, cash flows, and balance sheet projected. If you are financing with balance sheet cash and raising straight debt, then shares outstanding shouldn't change. Thus, many of the points I mentioned above will apply here (pro forma-ing the financials for each target acquisition and affected cash flows and net debt appropriately). You'll end up with a consolidated net income number, and then calc EPS based on the shares outstanding you assumed before.

Aug 1, 2013
watdo:
BepBep12:
peinvestor2012:

LBO model using acquisitions. Pretty standard.

Not trying to be a douche, but I think I'm missing something b/c I said Acc./Dil. - would you mind explaining at a high level why LBO vs. Acc./Dil.?

Private equity firms usually engage in rollups, not strategic buyers. I think that peinvestor is making this assumption.

Partially. Generally rolling up is synonymous PE. But, we will run an LBO even as we advise strategic clients on the buy side to assess the value of leveraged returns. If a strategic is planning to buy and hold and use debt to fund a significant portion of the acquisition, we want to see what the returns look like for a given transaction value (and exit value) or inversely what valuation range to target given return expectations.

BepBep, you are right that A/D is one way to do it. If the acquisition involves debt though, we will likely run both. However, the LBO has built in acquisitions that make roll-ups easier to analyze. But, what happens if it is funded with 100% debt, as CaliBanker alluded to? A/D is rather obvious at that point, though the degree will vary. But, your client wants to see how quickly they can repay debt (or make another acquisition) and the returns the acquisition(s) will provide.

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Aug 1, 2013
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'Before you enter... be willing to pay the price'