{"id":22064,"date":"2020-03-04T00:20:27","date_gmt":"2020-03-04T05:20:27","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/biws\/?post_type=biws_kb&#038;p=22064"},"modified":"2024-09-11T07:06:10","modified_gmt":"2024-09-11T12:06:10","slug":"investment-banking-assessment-centre-case-study","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/investment-banking-assessment-centre-case-study\/","title":{"rendered":"Merger Model: Assessment Centre Case Study (24:14)"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-flat ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Merger Model: Assessment Centre Case Study<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/investment-banking-assessment-centre-case-study\/#Step_1_Read_and_interpret_the_instructions%E2%80%A6_and_understand_where_to_cut_corners\">Step 1: Read and interpret the instructions&#8230; and understand where to cut corners!<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/investment-banking-assessment-centre-case-study\/#Step_2_Enter_the_financial_information_for_Company_A_and_Company_B\">Step 2: Enter the financial information for Company A and Company B.<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/investment-banking-assessment-centre-case-study\/#Step_3_Calculate_the_%E2%80%9Cmissing_information%E2%80%9D_%E2%80%93_Net_Income_EPS_and_Share_Counts\">Step 3: Calculate the &#8220;missing information&#8221; &#8211; Net Income, EPS, and Share Counts.<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/investment-banking-assessment-centre-case-study\/#Step_4_Go_up_to_the_top_and_enter_the_key_assumptions_starting_with_Question_1\">Step 4: Go up to the top and enter the key assumptions, starting with Question #1.<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/investment-banking-assessment-centre-case-study\/#Step_5_Combine_the_Income_Statements_for_Company_A_and_Company_B\">Step 5: Combine the Income Statements for Company A and Company B.<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/investment-banking-assessment-centre-case-study\/#Step_6_Calculate_Accretion_Dilution_and_the_Pro-Forma_Credit_Stats\">Step 6: Calculate Accretion \/ (Dilution) and the Pro-Forma Credit Stats.<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/investment-banking-assessment-centre-case-study\/#Step_7_Create_sensitivities%E2%80%A6_if_you_have_time\">Step 7: Create sensitivities&#8230; if you have time.<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/investment-banking-assessment-centre-case-study\/#Step_8_What_is_the_POINT_of_this_case_study_exercise\">Step 8: What is the POINT of this case study exercise?<\/a><\/li><\/ul><\/nav><\/div>\n\n<h2><span class=\"ez-toc-section\" id=\"Step_1_Read_and_interpret_the_instructions%E2%80%A6_and_understand_where_to_cut_corners\"><\/span>Step 1: Read and interpret the instructions&#8230; and understand where to cut corners!<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Requirements: Need to be able to change the purchase price and % debt and stock used&#8230; but cash and the foregone interest on cash are unnecessary, which simplifies things.<\/p>\n<p>Also, they&#8217;ve given us incomplete information in a few spots and we need to go through and calculate some figures for Company A and Company B, such as the shares outstanding.<\/p>\n<div class='code-block code-block-2' style='margin: 8px 0; clear: both;'>\n<div class=\"kb-adinsert-modal\">\n    <div class=\"kb-adinsert-top\">\n      <div class=\"media\">\n          <img decoding=\"async\" class=\"alignnone size-full wp-image-28448\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/24164120\/adv-fm-tile.png\" alt=\"PowerPoint Pro\" width=\"128\" height=\"128\" \/>\n      <\/div>\n      <div class=\"content\">\n          <h3>Master Financial Modeling for Investment Banking With <strong>BIWS Core Financial Modeling<\/strong><\/h3>\n      <\/div>\n    <\/div>\n    \n    <div class=\"full_text\">\n    \t<ul>\n        \t<li>\n            \t<h4>Become a financial modeling pro<\/h4>\n              <p>158 videos, detailed written guides, Excel files, quizzes, and more<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Complete 10+ detailed global case studies<\/h4>\n            <p>These include both the theory and the practical applications<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Prepare for your internship or full-time job<\/h4>\n            <p>Gain the skills you need to \u201chit the ground running\u201d on Day 1\n\n<\/p>\n\t\t\t  <\/li>\n      <\/ul>\n        \n      <a class=\"cta-link orange-button-medium\" href=\"https:\/\/breakingintowallstreet.com\/core-financial-modeling\/\" target=\"_blank\">Full Details<\/a>\n      \n      <a class=\"cta-link orange-button-medium bg-blue\" href=\"https:\/\/biws-support.s3.us-east-1.amazonaws.com\/Course-Outlines\/Core-Financial-Modeling-Course-Outline.pdf\" target=\"_blank\" rel=\"noopener\">Short Outline<\/a>\n    <\/div>\n<\/div><\/div>\n\n<p>SKIP the formatting!<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Step_2_Enter_the_financial_information_for_Company_A_and_Company_B\"><\/span>Step 2: Enter the financial information for Company A and Company B.<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Fairly straightforward, but remember that we need to calculate a few additional numbers for this to work, such as the shares outstanding for each company and the Net Income and EPS, at least for the buyer.<\/p>\n<style>.enteremail__large--inline{margin:60px auto!important}<\/style>\n<h2><span class=\"ez-toc-section\" id=\"Step_3_Calculate_the_%E2%80%9Cmissing_information%E2%80%9D_%E2%80%93_Net_Income_EPS_and_Share_Counts\"><\/span>Step 3: Calculate the &#8220;missing information&#8221; &#8211; Net Income, EPS, and Share Counts.<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Start with Pre-Tax Income, then calculate Net Income based on the tax rates for both companies, and then EPS&#8230; not completely necessary for Company B, but definitely need it for Company A.<\/p>\n<p>Then, calculate the Share Count for both companies and the Enterprise Value (just for reference).<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Step_4_Go_up_to_the_top_and_enter_the_key_assumptions_starting_with_Question_1\"><\/span>Step 4: Go up to the top and enter the key assumptions, starting with Question #1.<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>To save time, skip the (1 + Premium) * Share Price * # Shares calculation and just calculate the purchase price based on the premium to Company B&#8217;s Market Cap instead &#8212; same result either way.<\/p>\n<p>Calculate %s for debt and stock, then the amount of debt raised, debt interest rate, and shares issued.<\/p>\n<p>Then, fill in the information about the synergies &#8212; no information on expenses here, so we leave it out.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Step_5_Combine_the_Income_Statements_for_Company_A_and_Company_B\"><\/span>Step 5: Combine the Income Statements for Company A and Company B.<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Start with the Synergies, and then combine all the other line items, factoring in those synergies on top. Remember to factor in acquisition effects, such as additional interest expense.<\/p>\n<p>Calculate down to EPS, making sure you include the NEW shares issued in the transaction and increase Company A&#8217;s share count as appropriate.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Step_6_Calculate_Accretion_Dilution_and_the_Pro-Forma_Credit_Stats\"><\/span>Step 6: Calculate Accretion \/ (Dilution) and the Pro-Forma Credit Stats.<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Take the combined company&#8217;s EPS and divide by the buyer&#8217;s EPS and subtract 1.<\/p>\n<p>For the credit stats, the two key ones are the Leverage Ratio (Net Debt \/ EBITDA here) and the Coverage Ratio (EBITDA \/ Interest) &#8211; so calculate those each year.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Step_7_Create_sensitivities%E2%80%A6_if_you_have_time\"><\/span>Step 7: Create sensitivities&#8230; if you have time.<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Here, we would argue it&#8217;s pointless since it takes more time and effort to set them up, and they don&#8217;t save much time beyond the model we already have &#8212; so we&#8217;re skipping this step.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Step_8_What_is_the_POINT_of_this_case_study_exercise\"><\/span>Step 8: What is the POINT of this case study exercise?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><strong>Takeaway #1:<\/strong> Even if we pay a higher premium for a seller, the deal might be MORE accretive depending on the purchase method&#8230; debt tends to be less expensive than stock.<\/p>\n<p><strong>Takeaway #2:<\/strong> Company B is a very cheap asset &#8212; MUCH lower P \/ E and EV \/ EBITDA multiples than Company A.<\/p>\n<p>When a more expensive buyer acquires a much less expensive seller, the deal will almost always be accretive. Company B&#8217;s significantly higher tax rate also makes a difference &#8212; Company A gets &#8220;free money&#8221; after the acquisition since it&#8217;s only paying 25% in taxes rather than 40%.<\/p>\n<p><strong>Takeaway #3:<\/strong> Using debt tends to produce more accretion than stock, but it also produces higher leverage ratios and lower coverage ratios &#8212; so there is a trade-off between accretion \/ (dilution) and the credit stats following the deal.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>In this Merger Model tutorial, you&#8217;ll learn how to complete a merger model case study exercise given at an assessment center.<\/p>\n","protected":false},"featured_media":22069,"template":"","class_list":["post-22064","biws_kb","type-biws_kb","status-publish","has-post-thumbnail","hentry","kb_category-ma-and-merger-models"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/22064","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media\/22069"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=22064"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}