Mergers & Acquisition Analysis
Problem 2
| Answers are required in all light red-shaded boxes. | ||||||||
| Problem 2 | ||||||||
| 80% Debt | ||||||||
| Pro-Forma | ||||||||
| Target | Buyer | NewCo | ||||||
| Book Value | Mkt Value | Book Value | Mkt Value | |||||
| 12/31/18 | 12/31/18 | 12/31/18 | 12/31/18 | 12/31/18 | ||||
| Current Assets | 50,000 | 40,000 | 500,000 | 400,000 | ||||
| PP&E | 2,000,000 | 4,000,000 | 9,000,000 | 8,000,000 | ||||
| Goodwill | – 0 | – 0 | – 0 | – 0 | ||||
| Other Assets | 200,000 | 300,000 | 800,000 | 750,000 | ||||
| Total Assets | 2,250,000 | 4,340,000 | 10,300,000 | 9,150,000 | – 0 | |||
| Accts Payable | 50,000 | 50,000 | 50,000 | 50,000 | ||||
| Long-Term Debt | 1,000,000 | 1,290,000 | 4,000,000 | 4,100,000 | ||||
| Equity | 1,200,000 | 3,000,000 | 6,250,000 | 5,000,000 | ||||
| Total Liabilities and Equity | 2,250,000 | 4,340,000 | 10,300,000 | 9,150,000 | – 0 | |||
| 2019E EPS | 1.00 | 3.00 | ||||||
| Shares Outst. | 100,000 | 75,000 | ||||||
| Price/Share | 40.00 | 40.00 | ||||||
| P/E Multiple | 40x | 13.33x | ||||||
| Debt/Capital | 45.5% | 39.0% | ||||||
| Interest Rate on Debt pre-tax | 8.0% | |||||||
| Percent Debt | 80.0% | |||||||
| Tax Rate for both | 25.0% | |||||||
| 1. Assume Buyer is acquiring Target, financed with 80% debt and 20% stock. The stock prices shown above | ||||||||
| are the prices involved (i.e., the buyer’s stock at time of deal is $40 and they are paying $40/share for the target). | ||||||||
| The deal is closing on 12/31/18. Interest rate and tax rate assumptions are shown above. | ||||||||
| Shares outstanding and 2019 Estimated standalone EPS are given above. | ||||||||
| Calculate the 2019E EPS of the combined entity. Assume zero synergies. | ||||||||
| EPS | = | |||||||
| 2. What amount of pre-tax synergies are required to make the combined | ||||||||
| EPS break-even? If the deal is already break-even or accretive, you can answer “n/a.” | ||||||||
| Pre-Tax to Breakeven = | ||||||||
| 3. Fill in the combined pro-forma Balance sheet at 12/31/18 for the new Buyer company | ||||||||
| Include the new number of Buyer shares outstanding after the close. | See Above Red Boxes within H9-H29 range | |||||||
| 4. Fill in the boxes for the cash portion per share and the exchange ratio of the deal (red boxes): | You would say this deal is structured as: | |||||||
| Cash, plus | ||||||||
| shares of Buyer per share of Target | ||||||||
| 5. What is the Pro Forma Debt/Capitalization Ratio for NewCo? | ||||||||
| 6. What percentage of NewCo does Buyer control? |