Financial Modelling for Mergers and Acquisitions
'Financial Modelling for Mergers and Acquisitions' is a hands-on course that offers practical instruction on how to model economic, financial and strategic issues associated with M&A.
Course dates
Course overview
'Financial Modelling for Mergers and Acquisitions' is a hands-on course that offers practical instruction on how to model economic, financial and strategic issues associated with M&A. The course addresses programming and model structuring where attendees build their own valuation model. Case studies illustrate the practical issues associated with M&A modelling including minority interest, goodwill, taxes, debt financing, alternative capital structures in buyouts, exchange ratios and taxes.
Summary of course content
- M&A and structure of financial models
- Standalone valuation in a merger transaction
- Risk assessment and cost of capital
- Leveraged buy-outs
- Accounting and financing structures in M&A
- Technical modelling issues
Includes: Discussion on the global financial crisis and lessons learned with respect to modelling and valuation
Methodology
As with all Euromoney Training courses, the emphasis is on the practical and interactive exercises and real life case studies. The course will also involve group work, presentations and discussions. The programme will develop attendees skills, enabling them to return to the workplace and implement immediate change.
Who should attend this training course?
- M&A specialists
- Corporate financiers
- Financial analysts
- Investment bankers
- Securities analysts
- Accountants involved in structuring M&A deals
Supporting publications
DAY ONE
Introduction to M&A and structure of financial models
- Skills for effective modelling and objectives in financial modelling for M&A transactions.
- Empirical evidence on the performance of M&A endeavours:
- Is there an economic rationale for mergers?
- Post-acquisition: how to determine success?
- Examples of successful mergers?
- What is the empirical evidence on the success of mergers?
- What does a real-world M&A model look like?
- What are the real incentives of investment bankers with respect to M&A transactions?
- How should the modelling of a merger be structured?
- Review of basic terminology in M&A
- Course themes
- Alternative approaches to measure risk: theory, market and mathematics
- Free cash flow valuation vs. earnings analysis
- Valuation from premium and synergy vs. earnings dilution
- Risk analysis and debt capacity in valuation
- Accounting in M&A
- Purchase accounting
- Minority interest
- Goodwill, impairment, and equity balance
- Asset write-ups and write-downs
- Tax accounting
- Review of M&A models
- Standalone target valuation model
- LBO model
- Comprehensive M&A model
- Work with M&A template model
Standalone valuation in a merger transaction
- Free cash flow in decision making
Exercise: participants learn the mechanics of computing free cash flow from financial statements and will consider how free cash flow can be practically applied in valuation of stocks.
- How do investment banks come up with valuation of acquisition candidates?
- The pros and cons of various valuation methods
- How do investment banks present results of their valuation analysis?
- How can we get our heads around the terminal value (equity vs. asset ratios)?
- What multiple method is best in various industries?
- What does the price to earnings ratio really mean in terms of value generated by a company?
- How do the mechanics of alternative valuation techniques work?
Class exercise: NPV and IRR tools
Class exercises: PE ratio and growth
Case study: historic financial analysis as background for valuation
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Evaluation of growth rates over alternative periods
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ROE vs. ROIC in assessing historic performance
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Interpretation of credit ratios
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Construction of basic forecast variables
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Valuation discussion
- Alternatives-multiples, DCF, venture capital, risk neutral, option pricing
- Discounting, growth and terminal value
- Fixed rate debt valuation in M&A
- Use of multiples in valuing acquisition candidates
- Alternative multiples
- Rationale behind alternative multiples
- When to use equity multiples (P/E) and asset multiples (EV/EBITDA)
- Exercise on reconciliation of alternative multiples
- Discounted free cash flow
- Theory and economic value analysis (EVA®)
- Foreign currency, inflation and free cash flow
- Intermediate and long-term growth
- DCF application
DAY TWO
- Development of a basic model from a blank slate
- How can we make the models flexible enough to use historic financial data, future projections and estimates of residual value?
- What should the financial statements look like in our models?
- What are the excel rules that guide accurate and efficient development of models?
- How can financial models be audited to check for human errors?
- How can we incorporate alternative debt structures and interest during construction into the model?
- Corporate modelling and standalone valuation
- Layout of standalone models
- Mistakes in valuation
- Inputs and working analysis in valuation models
- Debt and financial structure
- Capital assets and depreciation without acquisition
- Financial statement analysis for modelling
- Construction of a corporate model for standalone valuation
- Building a working analysis from history
- Incorporating multiple debt issues
- Creating vintage depreciation
- Building financial statements from a blank slate
- Computing free cash flow
- Incorporation of acquisition in model
- Sources and uses of funds
- Financing the acquisition
- Debt schedule
- Incorporation into financial statements
- Analysis of results
Risk assessment and cost of capital
- Risks associated with valuation are evaluated through application of the cost of capital, sensitivity analysis and simulation using volatility of cash flows.
- What basis should be used for evaluating cost of capital given how badly the CAPM has been
discredited?
- How do investment banks compute cost of capital in M&A analysis?
- What fundamental value drivers create risks in M&A modelling?
- Given the difficulties in measuring cost of capital and residual value, what alternatives approaches to free cash flow should be used?
- What are the pros and cons of using alternative multiples in valuing acquisition candidates?
- How can tornado diagrams be applied in M&A applications?
- How useful are option pricing concepts related to creating time series equations with volatility and using Monte Carlo simulation in assessment of risk?
- Cost of capital and decision making
- Investment decisions and cost of capital
- Cost of capital and valuation
- Cost of capital applied to free cash flow
- CAPM and its limitations
- Use of PE ratios to compute cost of capital
- Measurement of risk in valuation models
- Sensitivity analysis
- Break-even analysis
- Scenario analysis
DAY THREE
Synergy analysis
- Valuation of synergies depends on specific circumstances, but some common principles apply.
- Where do companies involved in acquisitions say that synergies come from?
- How should the value of synergies relate to the amount of money paid for an acquisition?
- How are synergies estimated in transactions given the short time frame for completing transactions and the confidential nature of much of the data?
- What statistical methods can be used to compute synergies?
- Theory of synergies
- Optimisation of asset management
- Alternative types of synergies
- Receipt of synergy valuation by target or acquiring company
- The synergy trap
- Negative synergies
- Identifying synergies
- Unique synergies to acquiring company or industry
- Economies of scale
- Marketing improvements
- Productivity enhancements
- Negative synergies
Case studies: identifying synergies
- Valuation of synergies
- Available information
- Level of detail
- Examples of synergy valuation
- Alternative ways to achieve savings
Case studies: synergy valuation
Acquisition and share exchange ratio analysis
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How do we measure the costs and benefits of an acquisition?
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How do we add acquisitions to a model?
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Can we just use realistic acquisition premiums in the analysis rather than theoretical valuation?
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Share exchange ratios vs. cash transactions
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How can we model minority interest in a transaction?
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Cost benefit modelling of acquisition
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Accretion and dilution
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Acquisition premiums and measuring value
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Credit constraints in transactions
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Public company analysis in M&A
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Share exchange exercise and earnings accretion and dilution
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Translation of exchange ratios into implicit prices
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Combined and standalone EPS with different growth estimates
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Share exchange exercise to compute dilution
DAY FOUR
Accounting and financing structures in M&A
- Issues associated with the dilution and accretion affect of acquisitions. Actual financial data from companies is used in the class exercises.
- What are the effects of issuing debt and equity in a transaction?
- How should models for two companies be consolidated?
- What adjustments should be made on a pro-forma balance sheet?
- How can you use a model to assess the ability to finance a transaction?
- Currency in an M&A transaction
- Cash payment and debt financing of M&A transactions
- Share issuances in M&A transactions
- Accounting with pooling of interests and purchase accounting
- Sources and uses statement and goodwill
- Components of sources and uses
- Debt retirement and issues
- Transaction costs
- Asset write-ups and write-downs
- Pro-forma balance sheet
- Existing balances
- Incorporation of sources and uses
- Incorporation of goodwill
- Pro forma exercise
- Consolidation
- Format of consolidation
- Incorporation of individual company results
- Financing and tax calculations
- Consolidated financials
Case study and leveraged buyouts
- A controversial form of acquisition is leveraged buyouts (LBO)
- Have LBOs been good for the economy?
- What type of financial ratios and cash flow analysis is required to complete an LBO?
- What amounts of senior debt, subordinated debt and mezzanine financing should be used in raising money for an LBO?
- How can cash flow waterfalls, asset sales, covenants and other aspects of LBOs be modelled?
- Review of LBOs
- Definition of and theory behind LBOs
- Studies of efficiency from LBOs
- Debt structure in LBOs
- Senior and subordinated debt
- Covenants
- Rating agencies
- Financial ratios
- Modelling of LBOs
- Cash flow waterfall
- Modelling the impact of covenants
- Project finance model outputs
Technical modelling issues
- Additional evening sessions will address technical issues that arise in project finance modelling. Subjects include working capital, formatting, use of data tables, depreciation, leases, and resolving circularity. Further use of macros in modelling and financial issues associated with the topics will be covered.
- Does it matter that circularity arises in our models?
- Are data tables worth the hassle in model building?
- What should be done to include movements of working capital in the model?
- Can we demonstrate the basic cost and benefits of leases with a simple model?
- Circularity macros
- Alternative methods to resolve circularity
- Working with range names
- Alternative ways to enter data
- Use of range names
- Theory and analysis of leases
- Tax depreciation vs. debt repayment
- Tax reasons for using leases
- Formulas for computing lease payments
- Accelerated depreciation
- Tax depreciation conventions
- Formulas for computing tax depreciation
- Vintage computations of tax depreciation
InterContinental Grand Stanford Hotel, Hong Kong, Hong Kong
This programme takes place on a non-residential basis at the InterContinental Grand Stanford Hotel. Non-residential course fees include training facilities, documentation, lunches and refreshements for the duration of the programme. Delegates are responsible for arranging their own accomodation, however, a list of convenient hotels (many at specially negotiated rates) is available upon registration.
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Ed Bodmer
Edward Bodmer has created innovative forward pricing, productivity measurement and investment valuation software for consulting clients throughout the United States. He has taught energy economics and finance throughout the world, and formulated significant government policy and corporate strategy in the U.S.
Mr. Bodmer's consulting clients include investment banks, commercial banks, research institutions and government agencies on a wide variety of complex valuation and advisory matters. He has constructed a unique framework for electricity price forecasting and valuation using production cost modelling techniques combined with option price theory and Monte Carlo simulation.
Mr. Bodmer is also an adjunct professor at leading University where he teaches courses in microeconomics. Along with his practical experience that covers a multitude of major advisory projects, he has taught specialised courses in financial modelling, electricity pricing, option valuation, mergers and acquisitions and contracting to investment banks, commercial banks, industrial corporations and electric utility companies.
Mr. Bodmer was formerly Vice President at the First National Bank of Chicago where he directed analysis of energy loans and also created financial modelling techniques used in advisory projects. He has used the models in providing expert testimony on subjects ranging from capital structure to investments in multi-billion dollar nuclear plants to complex valuation of new investments.
Mr. Bodmer received an MBA degree specialising in econometrics (with honours) from the University of Chicago and a BS degree in finance from the University of Illinois (with highest university honours). He has written many articles and is in the process of completing a textbook on valuation of electricity assets.
Interested in holding this course in-house? Please fill out your details and a member of our team will be in touch with more information.
Course dates