Harvard Extension Business Society /
Mergers & Acquisitions Workshop
Quick Reference Sheet /

Table of Contents

Module 1- Calculating Purchase Price through DCF

Step 1- WACC Calculation

Step 2 – Free Cash Flow Calculation

Step 2- Calculate Enterprise Value

1.NPV of Annual Cash Flows

2.PV of Terminal Value

Step 3- Calculate Equity Value

Module 2- Note on Sources & Uses Schedule

Module 3- Goodwill Calculation Process

Step 1- Calculate Purchase Premium to Allocate

Step 2- Note on Write-Up Adjustments

Step 3- Calculation of New Deferred Tax Liability

Module 4- Business Combination & Accretion / Dilution Analysis

Step 1- Revenue Synergies

Step 2- COGS Associated with Revenue Synergies & COGS Synergies

Step 3- Operating Adjustments

Step 4- Non-Operating Adjustments

Step 5- Ownership Splits Adjustments

Step 6- Accretion / Dilution Analysis

Module 1- Calculating Purchase Price through DCF

Step 1- WACC Calculation

  • Cost of Debt:
  • Cost of Equity:
  • Cost of Preferred:
  • *UnleveringRelevering Beta
  • Unlever Beta of Comps- Removes Capital Structure of all Comps
  • Calculate Average Unlevered Beta for Comps
  • Relever Beta to Target Company’s Capital Structure

Step 2 – Free Cash Flow Calculation

Earnings Before Interest * (1 – t)

+Depreciation Expense

- Change in CAPEX

-Change in Working Capital

______

=Free Cash Flow to the Firm

Step 3- Calculate Enterprise Value

1.NPV of Annual Cash Flows

2.PV of Terminal Value

  1. Approach A: Perpetuity Growth
  2. Calculate PV of Terminal FCF
  3. Calculate PV of Terminal Value
  4. Long-term Growth Rate: Long-term growth of Economy (GDP)
  5. Approach B: Exit Year EBITDA Multiple
  6. Calculate Terminal Value
  7. Calculate PV of Terminal Value

Step 4- Calculate Equity Value

Module 2- Note on Sources & Uses Schedule

Since the Sources of funding must equal the uses of funding, there will be a plug used in the model, Excess Cash Used. The calculation consists on:

  • To calculate all sources and uses, multiply source/use by the equity purchase price

Module 3- Goodwill Calculation Process

Step 1- Calculate Purchase Premium to Allocate

Goodwill Calculation:
Equity Purchase Price:
Less: Seller Book Value (Shareholders Equity):
Plus: Write-Off of Existing Seller Goodwill:
Total Allocable Purchase Premium:

Step 2- Note on Write-Up Adjustments

  • Given that Goodwill is an asset, consider the following scenarios on the balance sheet:

Total Allocable Purchase Premium:
Less: Write-Up of PP&E:
Less: Write-Up of Intangibles:
Less: Write-Down of Deferred Tax Liabilities:
Less: Write-Down of Deferred Tax Assets
Plus: New Deferred Tax Liability:
Total Goodwill Created:

Adjustmens Rules of Thumb

  • Write-ups on assets:
  • Subtracted from Goodwill because we need to allocate less to close the gap in the balance sheet
  • Write-down of assets:
  • Would be added to Goodwill because we would then need to allocate more to close the gap in the balance sheet
  • Write-downs on liabilities:
  • Would be subtracted from Goodwill because we need don’t to allocate as much to close the gap in the balance sheet
  • Write-ups on liabilities:
  • Would be added to Goodwill because we need to allocate more to close the gap in the balance sheet

Step 3- Calculation of New Deferred Tax Liability

Module 4- Business Combination & Accretion / Dilution Analysis

Step 1- Revenue Synergies

  • Calculate percentage increase based on the combined entity’s revenue
  • Link revenue Synergies in Merger Model to Revenue Synergies Schedule

Step 2- COGS Associated with Revenue Synergies & COGS Synergies

  • COGS Associated with Revenue Synergies:
  • Calculate COGS Margin of Combined Entity
  • Calculate Combined COGS
  • COGSSynergies
  • Link to COGS Synergies in Synergies Schedule
  • Important: Recall that COGS Synergies are in the form of improved margins

Step 3- Operating Adjustments

  • OpEx Synergies
  • Link to OpEx Synergies in Synergies Schedule
  • Important: Recall that OpEx Synergies are in the form of improved margins
  • Amortization of New Intangibles (Definite-Lived)
  • Depreciation from PP&E Write-Up

Step 4- Non-Operating Adjustments

  • Foregone Interest on Cash: The opportunity cost of using the cash to fund the transaction
  • Interest Paid on New Debt Issued:
  • Amortization of Financing Fees:

Step 5- Ownership Splits Adjustments

  • New Shares Issued:

Step 6- Accretion / Dilution Analysis

  • Calculate Acquirer Standalone EPS
  • Calculate Combined Entity EPS
  • Diluted shares based on acquirers projected diluted shares
  • Accretion / Dilution Calculation
  • Change in Dollar Value
  • Change in % Basis

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