Merger Model Exercise

therainmaker300:

can anyone help this noob out? how do i deal with bonds? Does anyone know of a tutorial or a book that explains the basics?

thanks.

Bonds will impact the given company's debt outstanding. If the securities are convertibles, they are bonds that have the ability to convert to equity in the company and thus can have a potential dilutive effect on the share count. Macabacus is a great free resource to begin learning modeling. You can also pick up Rosenbaum's book on investment banking valuation which will outline all the steps to various valuation processes in great detail.

Don't get discouraged as navigating financial statements typically takes a great deal of time. I would start with a search for "Long-term Debt" in the companies 10-K on edgar. It may be worth noting that a company like Net Flix may be a difficult company to value for your first modeling experience.

I would recommend trying to find a very simple company that sells widgets or basic products and evaluate a scenario where they acquire a similarly structured company.

The more you look at financial statements, the less foreign they become. For example, you will need to calculated Fully Diluted Shares Outstanding in order to see what the impact of a transaction is on the pro forma earnings per share. Basic shares for the end of the period are found at the bottom of the first page of the 10-K and then you can find the impact of options by searching for things like "based comp" or "stock options" in order to find securities that could potentially vest and thus increase the outstanding share count.

Many companies' statements will include hyper links so you can jump around to various sections quickly. This is great for going to "Consolidated Financial Statements" for example, where you can pull in data from the income statement, balance sheet, and cash flow statement.

If you are looking for color regarding the company's activities over the past year, you can look under "Results of Operations" under the MD&A (management's discussion & analysis) section.

Hope this helps you out... it can be confusing when you first start looking at this stuff, and modeling is a buzz word that is thrown out a lot but many times is not explained in great detail. When first starting, I would keep your assumptions very simplistic and focus on the mechanics of how the statements interrelate, and on making sure that you understand what you are doing and why you are doing it. You do not need a complicated SKU-level revenue build if you understand the concept that it such a process will ultimately just give you a more granular perspective on the company's revenue. You can use projections from Capital IQ if you are a student or simply apply reasonable growth rates based on what you have seen in similar companies.

Keep working at it and if it makes sense, purchase a self study modeling program like Breaking Into Wall Street's program. This will walk you through step by step how to construct a merger model, DCF, and leveraged buyout model.