Courses / Mergers & Acquisitions (Standard)

Mergers & Acquisitions (Standard)

37 Lessons

Mergers & Acquisitions (M&A) plays a critical role in business and in capital markets. It is the subject of companies buying and selling other companies. As investors, we may come across situations where the companies we own is attempting to acquire other companies. Similarly, we may also come across situations where other companies make us an offer to acquire a company that we own. We need to learn how to analyze the attractiveness of such proposed M&A transactions and how these proposed transactions will affect our investments. We’ll learn how M&A works conceptually and then apply these concepts into practice through an M&A case study where we evaluate Chipotle’s hypothetical acquisition of Wendy’s.

Key Takeaways:

  • Different buyers in M&A and their motivations
  • Acquisition currency mix and resulting impact on financials
  • How to build an M&A accretion / dilution model


1. What is Mergers & Acquisitions (M&A)


M&A is the subject of buying and selling of all or substantially all of the ownership of a company by another company.

2. Difference Between Mergers and Acquisitions


While both "mergers" and "acquisitions" refer to the buying and selling of companies, there is a subtle difference between the two terms.

3. Strategic Acquirers vs. Financial Sponsors


Broadly speaking, there are two types of buyers in an M&A transaction: Strategic Acquirers and Financial Sponsors.

4. Buyside M&A vs. Sellside M&A


There are two sides to every M&A transaction: the buyside (the buyers) and the sellside (the sellers).

5. The Language of M&A


In this lesson, we'll clarify some of the terminologies in M&A that can be confusing.

6. Strategic Rationale


Strategic Rationale is the logical reasoning that explains why an acquirer wants to purchase a target company.

7. Key Considerations in M&A


When executives evaluate M&A transactions, they take a number of considerations into account.

8. M&A from Investor's Perspective


How should investors think about M&A transactions? In this lesson, we'll develop the lens from which we should evaluate them.

9. Standalone vs. Pro Forma


Standalone describes the state of the company operating without M&A. Pro Forma describes the state of the company with M&A.

10. Pro Forma Financials


How should we think about the financials of a company post the M&A transaction?

11. Accretion / Dilution (Acc / Dil)


Accretion / Dilution measures the change between standalone and pro forma metrics.

12. How an M&A Model Works


In this lesson, we'll learn the logic flow behind an M&A model and understand the key steps to build it.

13. Chipotle and Wendy's M&A Case Study


To put what we learned in this course into practicce, we'll consider a case study of a hypothecal acquisition of Wendy's by Chipotle.

14. Modeling the Standalone Financials


In this lesson, we'll model the acquirer and the target's standalone financials for our Chipotle + Wendy's M&A case study.

15. Modeling Acquirer and Target Valuation


In this lesson, we'll model the acquirer and the target's valuations for our Chipotle + Wendy's M&A case study.

16. Acquisition Currency


Acquisition Currency represents the form of payment that buyer uses to pay the sellers for the purchase of the target company.

17. Acquisition Currencies' Cost of Capital


Different acquisition currencies have different costs of capital. Cash is cheaper than debt, which in turn is cheaper than stocks.

18. Acquisition Currencies' Impact on Accretion Dilution


The choice of acquisition currency has direct impact on the accretion / dilution of an M&A transaction.

19. Choice of Acquisition Currency


Companies don't always choose their currency based entirely on cost of capital or anticipated impact to accretion dilution.

20. Modeling Sources & Uses


In this lesson, we'll model the sources and uses for our Chipotle + Wendy's M&A case study.

21. Modeling the Sum of Acquirer and Target Financials


In this lesson, we'll add up the acquirer and the target's standalone financials for our Chipotle + Wendy's M&A case study.

22. Transaction Adjustments


The mere action of undertaking an M&A transaction will create incremental income and expenses, which are "Transaction Adjustments".

23. Foregone Interest on Cash


Foregone Interest on Cash is the interest income on the Balance Sheet Cash that the company will no longer earn.

24. Incremental Interest Expense


Incremental Interest Expense represents the interest expense on any new debt that the company borrows to pay for the acquisition.

25. Issuance of New Shares


Issuance of New Shares represents the additional stocks created when the company pays for the M&A transaction with stocks.

26. Revenue Synergies


Revenue Synergies are the extra revenue that the pro forma company can earn beyond the sum of the acquirer and the target’s revenue.

27. Cost Synergies


Cost Synergies are the cost savings that the pro forma company can achieve due to the combination of the acquirer and the target.

28. Cost to Achieve Synergies


Cost to Achieve Synergies represents the cost the pro forma company needs to incur in order to achieve the projected synergies.

29. Amortization of Capitalized Financing Fees


This lesson is a refresher of the topic on Amortization of Capitalized Financing Fee that we learned in the LBO course.

30. Incremental Depreciation & Amortization


M&A transactions can create incremental D&A expense.

31. Modeling Transaction Adjustments


In this lesson, we'll model the transaction adjustments for our Chipotle + Wendy's M&A case study.

32. Modeling Pro Forma Tax Rate


In this lesson, we'll model the pro forma effective tax rate for our Chipotle + Wendy's M&A case study.

33. Modeling Pro Forma Financials


In this lesson, we'll model the pro forma financials for our Chipotle + Wendy's M&A case study.

34. Modeling EPS Accretion / Dilution


In this lesson, we'll model the EPS accretion / dilution for our Chipotle + Wendy's M&A case study.

35. Drivers of EPS Accretion / Dilution


There are four major drivers that collectively influence an M&A transaction's accretion / dilution.

36. Why Strategics Pay More than Sponsors


Given the same target company, Strategic Acquirers can often outbid Financial Sponsors. Why is that?

37. Connecting Dots


Now that we understand how M&A works, let's connect the dots for everything we learned here.