Question

I have a M&A case presentation and I need to know how to answer these questions (I’ve done all the calculations already but really new to the subject and don’t know how to transform the numbers into verbal economic analysis):

- What is the value of operational and financial synergies of the merger? Are they meaningful? Do you see risks in attaining them? Highlight the main pros and cons for the whole deal for company A shareholders.

- What is the optimal financing package for the deal? Present the plan to minimize the cost of capital in this takeover deal. Highlight the main pros and cons from the financing side of the deal. Suggest one or two ideas to further lower the cost of capital.

Could someone give ANY tips on what to comment/what are general answers or wanted answers for these types of questions?

Thank you in advance!

Answer 1

It's very difficult to answere these questions in isolation without actually seeing and understanding the context. But you seems to be in a hurry. Hence, there is no point returning the question asking for more information. I will answer them based on my experience with M&A situations ans similar questions asked in the past:

- What is the value of operational and financial synergies of the merger? Are they meaningful? Do you see risks in attaining them? Highlight the main pros and cons for the whole deal for company A shareholders.

You will have to figure out if there are certi operational and financial synergies visible in the transaction given to you. A synergy means somethig which is now possible as a combined entity but was otherwise not possible for either of the two entities prior to the merger. Say for example neither target nor the acquirer was able to raise debt @ say 10% prior to the merger. However after the merger, the combined entity has stronger financial muscle and hence is able to raise fresh debt @ 8%. so this incremental 2% interest saving is a financial synergy.

Once you have identified the synergies, you need to value them by calculating the present value of these synergies. Alternatively, if you have valued the acquirer and target individually prior to merger and then combined after the merger, then you can straightway figure out the value of synergies by making use of the equation: Synergies = V(A + T) - V(A) - V(T)

Are synergies meaningful? There are argumentative answers in favor and against this statement. Based on real life examples, sysnergies fail to get materialized in over two - third of M&A transactions. So, please examine the strength of the synergies at your end. And ask these questions - are they implementable? Will there be cultural barrier? Will they produce the desired results? For how long? Based on answers to these questions, please frame your own response.

From the perspective of shareholders of Acquirer:

Pros: check if these are valid at your end

1. The deal may be EPS accretive

2. The deal might be giving access to A to new geographies, new products, new customers

3. The deal might be improving the market share, market reach, market penetration of A

Cons:

1. Synergies may be difficult to implement

2. Leverage may go up

3. Cultural difference between the employees and the organization

- What is the optimal financing package for the deal? Present the plan to minimize the cost of capital in this takeover deal. Highlight the main pros and cons from the financing side of the deal. Suggest one or two ideas to further lower the cost of capital.

Look at the sources of finance for this transaction. Where is the moneyh coming from, for this transaction? How much is the equity portion and how much is the debt portion? Calculate the WACC for these surces of capital. See how you can minimze this cost of capital by increasing the leverage but within controllable levels.