A 4-day, computer-based programme with case studies and workshop sessions featuring:

• M&A and the structure of financial models
• Standalone valuation in a merger transaction
• Risk assessment and cost of capital
• Synergy analysis
• Leveraged buy-outs
• Accounting and financing structures in M&A
• Technical project finance modelling issues

Financial modelling for M&A is designed as a four day course. For purposes of the outline, each of the four days is divided into two modules, resulting in a total of eight modules for the entire course.

Course Summary

Financial modelling for mergers and acquisitions is an intensive hands-on course in which you receive comprehensive instruction on modelling economic, financial and strategic issues associated with mergers and acquisitions. After describing general issues in mergers and acquisitions, the course covers programming and model structuring where you follow the lead of the instructor in building your own model. As the course progresses, you perform more work on an independent basis using two comprehensive case studies.

You will build a complete financial model in the context of M&A. To demonstrate various financial and modelling concepts, you will also complete focused computer exercises. In addition to building your own models, the course will cover how to use fully developed models that incorporate sophisticated M&A concepts. By the end of the course, you will be able to program and apply simulation, real options and tornado diagrams in the models you have developed on your own.

In the process of learning how to develop models for M&A analysis, the course addresses a wide variety of programming, financial, statistical and economic issues. Financial issues include valuation analysis, the theory of synergies, the currency used in a transaction and accounting for transactions and credit analysis of leveraged buy-outs. Statistical concepts addressed in the course include measurement of volatility, mean reversion and boundary conditions associated with economic time series. The programming issues include designing macros relevant for project finance models, auditing financial models, circularity associated with interest during construction, modelling of debt service reserves and organising financial models for effective presentations.

Course Benefits

Other than the most important item – knowledge of how to build, use and analyse financial models in an M&A context - you will receive many other resources. You will be provided with the following software:

• Basic corporate model with macros and instructions to create comprehensive analysis;
• Fully developed financial models with debt structuring, debt sizing, contract pricing and sensitivity analysis;
• Time series software that incorporates volatility, mean reversion and other parameters into models;
• Monte Carlo simulation software that combines times series analysis with financial modelling;
• Software that computes implied volatility and option pricing using the Black Scholes model;
• Yield spread models that compute the required yield spreads on project finance debt form time series analysis;
• Corporate modelling software that extends project finance models to evaluate valuation of entire corporations;
• Forward pricing software that projects prices from marginal cost analysis;
• A variety of macro exercises that compute debt capacity, resolve circularity, develop tornado diagrams and construct vintage depreciation.

You will also be provided with extensive databases on actual projects, commodity price history and case studies. Finally, you will receive a manuscript from the book Valuation and Forward Pricing of Capital Intensive Investments.

DAY 1

Module I: introduction to M&A and the structure of financial models

The course begins with introductory comments about the skills for effective modelling and general objectives in financial modelling for M&A transactions. After the introductory discussion, the course covers the empirical evidence on the performance of M&A endeavours. Issues include: Is there an economic rational for mergers? After an acquisition has been completed, how should we determine whether it has been a success or a failure? Can we find any successful mergers? Notwithstanding the media hype, 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 modelling of a merger be structured?

Lectures

• Review of basic terminology in M&A
• History of M&A
• Studies on M&A effectiveness
• Event studies
• LBO’s
• Recent history
• Selected examples
• Financial statement review for M&A
• Stock price and financial returns
• Price to earnings ratios and EV/EBITDA
• Return on equity and return on capital employed
• Value/Book and value to replacement cost
• Debt/Capital, EBIT/Interest, Debt/EBITDAX
• Model layout for M&A
• Financial model overview
• Transaction structure in M&A models
• Organisation of M&A models

Class exercises

Exercise 1a: Review of Modelling in Actual M&A Transaction

Exercise 1b: Simple Financial Model of an Acquisition

Module II: construction of basic financial model

You will learn how to build a model from a blank slate. The first modelling session covers development of a basic model, given capital expenditures, revenues and expenses. Issues addressed include: 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 some of the excel rules that guide accurate and efficient development of models? How can financial models be audited to check errors that we will make? What should we do to incorporate alternative debt structures and interest during construction into the model?

Lectures

• Comments on spreadsheet style and conventions
• Building block approach to modelling
• Basic mechanics of financial models
• Separation of historical period from projection period
• Sources and uses of funds statement in transaction
• Cash flow, net income, equity balance, construction financing and income taxes
• Construction of a balance sheet and use as an auditing tool
• Conversion of investment to corporate model
• Historical financial statements and reconciliation
• On-going capital expenditures and depreciation
• Mechanics of modeling outstanding shares
• Modelling of short-term debt and temporary securities
• Working capital
• Balance sheet approach
• Use of revenue and expense ratios
• Cash flow effects
• Mechanics of adding debt to financial models
• Debt balance tables
• Inclusion of interest expense, debt repayment and debt balance
• Credit quality measures

Class exercises

Exercise 2a: Base Model Layout and Financial Statements without Debt

Exercise 2b: Addition of Debt to the Basic Model

DAY 2

Module III: standalone valuation in a merger transaction

The second day begins with the valuation discussion by introducing the concept of free cash flow in decision making. You will 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. Issues addressed include: How do investment banks come up with valuation of acquisition candidates? What are the pros and cons of various valuation methods (other than getting the answer that we want)? How do investment banks present results of their valuation analysis? How can we get our hands around the residual value? What multiple method is best in various industries? What does the price to earnings really mean in terms of value generated by a company? How do the mechanics of alternative valuation techniques work?

Lectures

• Discounted free cash flow
• Theory and Economic Value Analysis (EVA)
• Free cash flow without leverage
• Cost of capital applied to free cash flow
• Residual value
• DCF compared to payback rule and accounting earnings criteria
• Use of multiples in valuing acquisition candidates
• Alternative multiples (P/E, EBITDA/ Value, M/B)
• Rational behind alternative multiples
• Multiples in transactions versus ongoing companies
• Multiples and valuation by business segments
• Valuation multiples in case study

Class exercises

Exercise 3a: Analysis of Valuation in Merger Transactions

Exercise 3b: Derivation of Implied Cost of Capital from Price Earnings Analysis

Exercise 3c: Application of Alternative Valuation Techniques in the Financial Model

Module IV: risk assessment and cost of capital

After covering valuation, we move to risk assessment in the valuation models. Risks are evaluated through application of the cost of capital, sensitivity analysis and simulation using volatility of cash flows. Issues addressed in this section include: 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 all of the difficulties in measuring cost of capital and residual value, what alternative 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?

Lectures

• 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
• Computation of cost of capital using alternative methods
• Dividend growth model
• Debt capacity model
• Risk premium method
• Implied cost of capital in financial ratios
• Merton model in valuation of equity
• Implied cost of capital from reverse engineering financial models of similar companies
• Adjustments to cost of capital for taxes and leverage
• Adjustments to beta for leverage
• Computation of all-equity beta
• Adjustments for interest expense
• Risk analysis of economic assumptions
• Commodity price risk
• Technology risk
• Input and supply availability risk
• Foreign currency and political risk

Class exercises

Exercise 4a: Time Series Model of Copper Prices

Exercise 4b: Break-even case using Southport Minerals

Exercise 4c: Inclusion of Sensitivity Analysis and Tornado Diagram in Southport Case

DAY 3

Module V: synergy analysis

A merger or acquisition involves a change in management control of assets. If management can achieve cost savings, marketing benefits or price increases through synergies, shareholder value is enhanced. Valuation of synergies depends on specific circumstances, but some common principles apply. Issues in the synergy part of the course include: Where do companies involved in acquisitions say that synergies come from? How should the value of synergies be related 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 data? What statistical methods can be used to compute synergies?

Lectures

• Theory of synergies
• Optimisation of asset management
• Alternative types of synergies
• Receipt of synergy valuation by target company or acquiring company
• The synergy trap
• Negative synergies
• Identifying synergies
• Unique synergies to acquiring company, industry or general
• Economies of scale
• Marketing improvements
• Productivity enhancements
• Negative synergies
• Case studies in identifying synergies
• Valuation of synergies
• Available information
• Level of detail
• Examples of synergy valuation
• Alternative ways to achieve savings
• Synergy valuation in case studies

Class exercises

Exercise 5a: Macro Exercises

Exercise 5b: Addition of Anthema assumptions to financial model

Exercise 5c: Computation of bid price with alternative cost of capital and country risk assumptions

Module VI: leveraged buy-outs

A controversial form of acquisition is leveraged buy-outs. This form of acquisition often involves complex capital structures with many tranches of debt and the debt has many covenants which adds difficulty to the modeling process. Issues addressed in this section include: Have leveraged buy-outs been good for the economy? What type of financial ratios and cash flow analysis is required to complete a leveraged buyout? What amounts of senior debt, subordinated debt and mezzanine financing should be used in raising money for a leveraged buy-out? How can cash flow waterfalls, asset sales, covenants and other aspects of leveraged buy-outs be modelled?

Lectures

• Review of leveraged buy-outs
• Definition of leveraged buy-outs
• Theory behind leveraged buy-outs
• Studies of efficiency from leveraged buy-outs
• Debt structure in leveraged buy-outs
• Senior and subordinated debt
• Covenants
• Rating agencies
• Financial ratios
• Modelling of leveraged buy-outs
• Cash flow waterfall
• Modelling the impact of covenants
• Project finance model outputs

Class exercises

Exercise 6a: Review of leveraged buy-out case

Exercise 6b: Modelling a complex debt structure in the context of a leveraged buy-out

DAY 4

Module VII: accounting and financing structures in M&A

A key question for management is how an acquisition will affect earnings per share and the general financial condition of the company after the acquisition. This section reviews issues associated with the dilution and accretion effects of acquisitions. Actual financial data from companies is used in the class exercises. Issues addressed in this section include: What are the benefits and costs of using multilateral agencies? What are the various multilateral agencies that can be used? How do rating agencies assess project finance debt? How can you use project finance models to assign a risk rating?

Lectures

• Currency in an M&A transaction
• Cash payment and debt financing of M&A transactions
• Share exchange in M&A transactions
• Accounting with pooling of interests and purchase accounting
• Mechanics of computing earnings accretion and dilution
• Translation of exchange ratios into implicit prices
• Combined and standalone earnings per share with different growth estimates
• Modelling from alternative perspectives
• Effects of financing on acquisitions
• Actual cases
• Relevance for valuation
• Tax effects

Class exercises

Exercise 7a: Exercise on Accretion and Dilution using Relative P/E Ratios

Exercise 7b: Comprehensive M&A Simulation with Goodwill Accounting, Acquisition Premiums, Debt and Equity Financing and Assumption of Existing Debt

Module VIII: technical project finance modelling issues 

The afternoon module deals with miscellaneous technical issues that arise in project finance modelling. Subjects include working capital, formatting, use of data tables, depreciation, leases, and resolving circularity. The module will cover further use of macros in modeling as well as financial issues associated with the topics. Issues include: 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 relatively simple model?

Lectures

• 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 versus 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

Class exercises

Exercise 8a: Computation of Lease Rates

Exercise 8b: Working Capital, Data Tables and Resolving Circularity

• 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.

  Courses run by this instructor

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  • Integrated Financial Management School - Istanbul
  • Corporate and Project Finance - Prague

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.

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