6) Once you have checked SDC’s announcement date, enter this and the effective date. Generally, you can trust SDC on the effective date
7) Get the business description from the Bloomberg or from the 10-K. Be brief but not vague
8) The type of merger doc you get will tell you what the structure of the deal is. If you’ve got a stock deal, then you will have a merger proxy S-4. If you have a cash tender offer, then you will have a 14D-1. Attitude (friendly vs. hostile) can be obtained from SDC. For the type of consideration offered, read the summary of the terms of the merger. You may not always need to show this in your comps
9) Calculate equity value using fully diluted shares outstanding and the offer price per share. This sounds straightforward, but it is often easy to get tripped up here. Things to
Practical Guidelines (Cont’d)
a) For a stock-for-stock deal, the price per share is implied. Some terms to get familiar with:
The exchange ratio is simply the number of shares of the acquiror being offered for every share of the target. So if Target Corp. received one share of Acquisition Corp. stock for every five of its shares, then the exchange ratio would be 1/5, or 0.2.
If you read the summary of the terms, you will either get a fixed ratio or a fixed price. In the case of a fixed price, the exchange ratio adjusts to fit the price. For example, if
Acquisition Corp. knows it wants to pay $5 per share for Target Corp., then the number of shares it must offer to get to that $5 will depend on its own stock price. If its price were $2 per share, then it would have to offer 2.5 of its own shares, and 2.5 would be the
exchange ratio. In other cases, the exchange ratio is fixed. So if Acquisition Corp. offered 2.5 of its shares for every Target share, then the implied value of the Target share is (2.5 x Acquisition Corp. share price). Therefore, the implied price will fluctuate over time. So you can see, either you hold the exchange ratio constant and vary the implied purchase price, or you have a fixed price and vary the exchange ratio
For our purposes, what we care about is what the shares were valued at prior to the announcement. So if the Acquiror’s share price was $10 on the day prior to the
announcement and the exchange ratio was 2, then the implied price per Target share would be $20. Often the merger proxy will state that the actual exchange ratio at the closing will depend on “the average closing price of the twenty trading days prior to the three days before the Effective Date...” Ignore it, unless for some reason this language is
Practical Guidelines (Cont’d)
b) Check the capitalization of the company to see if they have any convertible securities (debt and preferred stock). Often such securities have takeover provisions which allow them to convert upon a merger, in which case you want to include their value in the equity purchase price (of course, you will have to back out their value later when calculating the enterprise value)
c) Options. Generally, upon a change of control in a company, the options are bought out
by the acquiror. We need to account for this in the equity purchase price, so there are columns which will calculate this value for you. You can get this info either from the 10-K, or if available, from the merger proxy (you generally wont find this info in a 14D-1). Since we will usually not have a detailed breakout of what each individual option is, it is sufficient to take the average exercise price. When doing so, you should never get to a negative purchase price for the options because when the exercise price is less than the offer price, the options are worthless (“out of the money”)
10) Calculate the enterprise value by entering the appropriate debt and cash figures.
Remember, include marketable securities in the cash figure, and if you converted some pieces of debt or preferred in calculating them in the equity purchase price, do not include them here. Otherwise, that would be double counting
11) For LTM figures, make sure the numbers you input do not include unusual or nonrecurring items. Simply subtract them out from EBITDA and EBIT. For the net income line, make sure you take these out tax-affected. This means that for a net income calculation you would back out the unusual multiplied by (1-tax rate)
Practical Guidelines (Cont’d)
12) There might have been significant events for which you did not pro forma the numbers. Did the target purchase another company prior to being acquired that is not reflected in the
numbers? Did the target sell off assets or spin off a division? Use your judgment. Companies in high-growth industries can trade at high multiples (for example, technology deals can be done at 4x revenues, 15–20x EBITDA). Slow, prodding industries should not have such multiples. Also, if it is a hostile deal, then you may have pretty high multiples since the acquiror has to pay a big premium to get the deal done