M&A Transaction Case Studies are commonly seen in case competitions, and sometimes in actual investment banking work. They are a quick analysis of an M&A transaction, summarized in a few PowerPoint slides. They can be a great way to prepare for interviews, while learning about the details of a transaction.
Slide Deck Format
The format of the slide deck, like most investment banking decks, is very important. Investment bankers love quadrants, so you should split each slide into 4 rectangles, each with a distinct focus. The color is important – find out what the RGB values of the logo for the bank or company you are presenting to. Do not use too many colors, it is not a brand management presentation. The font should be consistent and simple – Arial is safe. The writing should be concise and precise, with absolutely no punctuation, grammar or spelling errors. The insights should be presented in threes: Company X bought Company Y because of A, B and C.
Slide Deck Content
The deal rationale is the most important part of the case study. There are usually strategic reasons for the merger, on top of the financial ones. Reading the analyst report or Management Discussion & Analysis (MD&A) will usually shed light on the issue, at least the publicly available ones. Understanding the deal structure will also be helpful: Is the deal for >50% of the company? Is it between 50% and 20%? How much is the acquisition premium? What sort of transactions has the acquirer done previous to this one?
You may also want to look at the rationale from the seller’s perspective. Why would the seller sale the company? Who owns shares in the company and why they sold for how much they did? Is the company in distress and under time constraint? Answering all these questions will give you a complete overview on why the deal was done.
Company, Industry and Macro Overview
This section usually comes first, as it sets the context for the rest of the analysis. You could start with the company and go up or the macroeconomics and go down. Questions you would like to answer here include: What is the central bank planning to do? How will that affect the industry the company is in? Is the acquirer or the acquiree well positioned for the change? What are some current trends in the demand for the company’s product? This section will supplement your deal rationale.
This section should be close to deal rationale, and will cover the structure of the deal. The overview will usually include: How much do you pay per share? Was it hostile or friendly? When was the deal announced and what was the premium on that day? Are there any conditions on the deal? Was the company financing the deal using debt or equity? This section will also supplement your deal rationale.
No investment banking PowerPoint is complete without a discussion of a company’s comparables. You can pull this data straight out of S&P Capital IQ, but you should know the differences between the companies in the peer group. Usually, you would want to remove a few less relevant companies, whether that is by market capitalization or operations. You should also know what the most important valuation metric is (usually EV/EBITDA for acquisition/consolidations), and how the acquiree is trading relative to the peer group.
Comparable transactions are past M&A transactions within a similar group. Comparables are adjusted for acquisition premium, so the value will be higher than PE or EV/EBITDA. It is important to look at previous transactions and see their rationale, as well as short-term and long-term stock performance. If there was poor performance, why? How would this transaction differ from the poor performing transactions?
Other Valuation Metrics and the Football Field
Other valuation metrics can also be included in the case study, namely discount cash flow analysis. The ranges of the different valuation metrics (along with metrics such as analyst estimates or 52-week trading range) can be combined to build a football chart. This chart will help visualize how the transaction value differ from the various valuation metrics.
Stock performance is a graphical description of how the stock performed after the announcement and after the transaction. You could also include index performance and/or trading volume in the secondary axis. The stock performance chart should be annotated with important events, such as the announcement of the deal, the closing of the deal, and any other relevant news. Normally, deals happen when the stock price of the acquiree drops, so it is worth annotating why the stock price dropped.
Accretion or Dilution
For mergers or acquisitions, there is usually accretion, but sometimes dilution. Whenever the value of the company being acquired is higher than the acquirer (acquiree has lower PE ratio), there is an accretion. If the acquiree is worth less (higher PE ratio), it will depend on how the transaction is funded (stock? debt? a mix of both?). Accretion or dilution measures how the EPS of the pro forma business compare to the previous EPS. Note that if there is no consolidation, the EPS will not be affected and accretion/dilution do not have to be calculated.
Financial Statements and Ratios
Financial statements can also be included in the case study, depending on the type of transaction. If it was a distressed investment, the balance sheet and the liquidity ratios would be important. If it was a normal acquisition, the income statement and the pro forma income statement may be worth showing. Ratios such as profitability, efficiency and solvency may also be important, as they could drive decisions such as whether or not to use debt in the transaction.
Data resources are typically provided by most undergraduate, MBA or MFin programs. If you do not have access to any of these data sources, you will need to find a friend, as looking at M&A deals without these would be very difficult.
- S&P Capital IQ
- Thomson One
- IBIS World