Financial Modeling Using Excel

Mergers and Acquisitions - Patni-iGate Deal

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Mergers & Acquisitions Analysis

The typical M&A deal involves an acquirer company taking over (or merging with) a target
company
There are a variety of the reasons for you to analyze an M&A transaction:
Your bank has a BUY-SIDE mandate (i.e. you are advising the acquirer)
Your bank has a SELL-SIDE mandate (i.e. you are advising the target)
Your bank has hired to provide a FAIRNESS OPINION to the Board of the acquirer or target

You are working on a counter-bid (e.g. white knight scenario)

You are looking for potential M&A deals to pitch to clients
You need to know more about a specific transaction

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Merger Analysis Model Map

Target Model

Target Model

Target Model

MERGER MODEL

Target
Ownership

After-Tax
Merger Cost

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COMBO Full Model

-Target Ownership
-EPS accretion/dilution
-Pre-Tax Synergies to Break-Even
-P/E to maintain Share Price
-Pro-forma EV/EBITDA
-Pro-forma Credit Ratios
-Pro-forma Incremental Debt
-Pro-forma Net Income
-Pro-forma WASO
-Pro-forma EPS
-Pro-forma EBITDA

Scenario Analysis
for Financing Cases

Analysis at
Various Prices

Contribution
Analysis

Merger Analysis- Steps

Inputs

Outputs

1) Market Data

1) Deal summary

2) Share Information

2) Simple Sensitivity Tables

3) Balance Sheet Information

3) 2D Sensitivity Tables

4) Income Statement Information

4) Contribution Analysis

5) Valuation Summary

5) Analysis at Various Prices

6) Deal Assumptions
7) Sources and Uses Table
8) Combo Shares
9) Goodwill
10) Combo Balance Sheet
11) Combo EPS

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Target Ownership
Target Ownership

Market Data
Company Names
Tickers
Unaffected Shares Prices
Prices Dates
Offer Premium

Share Information

Basic Share
Information

Diluted Share
Information

Offer Price
= Share Price *(1+ Premium)
From Latest Published
Financial Statements

Treasury Stock Method

Target Price should exclude any run-up ahead of deal date

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Target Ownership : Market Data

Target Ownership

Market Data
Company Names
Tickers
Unaffected Shares Prices
Prices Dates
Offer Premium

Share Information

Basic Share
Information

From Latest Published

Financial Statements

Diluted Share
Information

Treasury Stock Method

Offer Price
= Share Price *(1+ Premium)
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Target Ownership: Basic Equity

Target Ownership
Share Information

Market Data
Company Names
Tickers
Unaffected Shares Prices
Prices Dates
Offer Premium

Offer Price
= Share Price *(1+ Premium)

Basic Share
Information

Diluted Share
Information

From Latest Published

Financial Statements

Treasury Stock
Method

Equity Considerat ion Basic

Offer Price * Basic Shares Outstanding

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Target Ownership: Treasury Stock Method

Target Ownership

Market Data
Company Names
Tickers
Unaffected Shares Prices
Prices Dates
Offer Premium

Share Information

Basic Share
Information

Diluted Share
Information

Offer Price
= Share Price *(1+ Premium)
From Latest Published
Financial Statements

Treasury Stock Method

The diluted number of shares incorporates the potential conversion into shares of all existing dilutive
instruments (e.g. options, warrants, restricted stock units, convertibles etc.)
Only include instruments which are in the money (i.e. the instruments which are profitable for the holder to
convert)
For options, use the Treasury Stock Method
Assumes any proceeds from the conversion of the options are used to repurchase shares in the market
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Target Ownership: Treasury Stock Method Example

Example:

Total outstanding shares: 1000

Number of options: 100
Cash from options 100*5
Shares
500/12
Net new shares
100-42

Strike Price:
Market Price / Offer Price:
=
=
=

5
12

500
42
58

Shortcut formula for New Shares = No. of options * (1 - Strike Price/Market Price)

Purchase Price Per Share

For Target, use the Acquisition Price not the Market Price
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Target Ownership

Target Ownership

New Shares Issued

New Shares Issued Diluted Shares ofAcquirer

Basic Shares
Outstanding

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No of Options
Outstanding

Strike Price
Of Options

Market Price of
the Acquirer

Financing The Deal

Using the Acquirers Existing Cash
Excess cash is typically a low-yielding asset, and making an acquisition is potential way to increase the
Acquirers return on capital employed
Your analysis needs to consider the lost interest income or cash

Issuing Debt
New debt increases leverage and interest expenses decreases net income
Structure: Senior vs. junior; Cash vs. PIK; Covenants
Tax considerations

Issuing Shares
Dilutes existing shareholders
In certain countries, existing shareholders have pre-emptive rights. Do you need to structure a Rights Issue?

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After-tax Merger Cost

Merger Cost

Incremental After-Tax
Interest Expense

Amortization of
Capitalized Financing Fee

Financing Fee

Marginal
Tax Rate

Life of Debt

Current Pretax
Interest Expense
on Retired Debt

Pretax Interest
Expense on New Debt

New Debt
Required

Incremental Pre-Tax
Interest Expense

Cost
Of Debt
Existing Target
Debt Retired

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Marginal Tax
Rate (MTR)

Loss of
Interest Income

Cost
of Cash

Target + Acquirers
Cash Used

Current Pre-Tax
Interest Rate
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Goodwill Calculation
Purchase
Price

Fair Value of
Net Assets Acquired
GOODWILL

EQUITY PURCHASE
PRICE

New Intangibles

PP&E
Step-up
Advisory
Fees

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Net of the
related
Deferred
Tax
Liabilities

Equity Purchase
Price

Book Value
of Equity

Book Value of
Equity Bought

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Deal Assumptions
Make a list of all the deal- related assumptions
Financing Mix split only relates to the Equity purchased (the advisory fees are always financed
with cash)
The net assets of the target need to be adjusted to their fair value at the time of the deal.
In our example, we have:
Identifiable intangible assets, which are going to be amortized
Revaluation of PP&E, which is going to be depreciated

Interest on Acquisition Debt pre- tax: make a preliminary assumption. You will adjust it once you
know the leverage of the combo post- deal
Interest on Acquirers Cash pre- tax: if the acquirer uses an existing cash balance to finance the
deal, it will lose some interests income. Estimate cash interest rate on cash based on the
information you have on the acquirer.
Yearly synergies pre- tax: This is a preliminary assumptions on the cost synergies generated by the
deal, based on your views and/or what has been publicly announced.
Use the acquirers marginal tax rate to calculate the interest rates post-tax

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Deal Assumptions
Most deals generate some Cost and/or Revenue synergies
In our examples we assume SG&A synergies

Use the synergies announced and/or your views on the deal

Sanity-check:
Synergies as % of total SG&A:
what is the % reduction in costs?

Synergies as a % of Sales
what is the increase in profit margins?

Benchmark your assumptions against information from previous deals

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Combo EPS Calculation

Investors (current and Potential) are interested in the impact of the deal on the earnings of the
Acquirer
They will calculate the projected EPS for the Combo and will compare it with the projected EPS of
the acquirer stand-alone
Several factors impact on the Combo EPS
Acquirer Net Income

Target Net Income

Interest Expense on Acquisition Debt (post-tax)
Lost interest on Acquirers Cash as part of funding (post-tax)
Synergies(post- tax)
Extra depreciation and amortization (post-tax)

Number of new shares issued

Investors usually calculate a Cash EPS, ignoring the impact of non-cash changes , such as the extra
depreciation and amortization generated by fair value adjustments

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Combo Full Model: Pro-Forma EPS

Combo Full Model

Pro-forma
EPS

EPS
Accretion/
Dilution

Pro-forma
Net Income

Pre-Tax
Synergies to
EPS Breakeven

WASO

Pro-forma
EBITDA

EV/EBITDA
to Maintain
Share Price

P/E to maintain
Share Price

Acquirer' s Diluted Shares New Shares Issued

NI Acquirer NITarget After Tax Synergy After Tax Merger Cost

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Relative P/Es
We can run a back-of-the-envelope EPS accretion/dilution analysis using a relative P/Es
comparison.
We do not even need to calculate the Combo EPS!!
We need:

Acquirer P/E

Acquirer Share Price

Acquirer Diluted EPS Forecast

Offer Price
Acquisition P/E
Target Diluted EPS Forecast
1
Cash P/E
Post - Tax Cost of Debt

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Relative P/Es Stock Deals

In an All-Stock deal
Acquirer finances deal by issuing new shares
The new shares are the currency used to purchase Targets earnings

If Acquirer P/E > Target P/E , deal is likely to be ACCRETIVE

Target earnings are cheaper than Acquirer earnings
Financing cost is lower than the expected return

If Acquirer P/E > Target P/E , deal is likely to be DILUTIVE

Acquirer earnings are cheaper than Target earnings

Financing cost is higher than the expected return

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Contribution Analysis
Analyzes each partys contribution to Combo financials
Sales
EBITDA
Net Income

The relative contribution to earnings is important when negotiating the deal

The relative growth rates are an important factor
In all-stock deals, the relative ownership post deal is benchmarked against the relative
contribution to earnings
In all-stock deals, the relative ownership post deal is benchmarked against the relative
contribution to earnings
The Net Income contribution is usually less significant, as it is dependent on the pre-deal capital
structures

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Analyzing the deal

A Merger analysis allows you to assess:
Offer Price Range
Depending on the maximum premium that can be paid
What is the maximum premium that the Acquirer can offer before the deal becomes dilutive?
What synergies do you need to avoid dilution? Does the amount look realistically achievable?

Financing Mix ( Stock vs. Debt)

Stock: What is the maximum amount of shares that the Acquirer can issue, while still retaining control of
the Combo?
Debt: The debt capacity is capped by a maximum leverage level. Interest coverage should also be
considered.

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Thank You!

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