1. Corporate valuation and Mergers & Acquisitions

2. Mergers & Acquisitions Overview There are a variety of ways to value a company. The valuation methods include: Each of these topics, including Acquisition Comparables, is very important in investment banking.

3. Mergers & Acquisitions Background • A merger is the combining (or “pooling”) of two businesses, while an acquisition is the purchase of the ownership of one business by another. • Pooling of Interest Accounting, which is how mergers used to be accounted for, is no longer allowed by the Financial Accounting Standards Board (FASB) in the US, and was also disallowed by the International Accounting Standards Board (IASB) for international companies. • M&A transactions must now be accounted for using the Acquisition Method of Accounting (a slightly revised version of the Purchase Method of Accounting). This all can be very confusing, because the word “Mergers” is frequently used to describe either type of combination of two business, but all combinations must now be treated as the purchase of one company by another (in other words, as “Acquisitions”).

4. REASONS FOR PURSUING M&A • Increase and diversify sources of revenue by the acquisition of new and complementary product and service offerings (Revenue Synergies) • Increase production capacity through acquisition of workforce and facilities (Operational Synergies) • Increase market share and economies of scale (Revenue Synergies/Cost Synergies) • Reduction of financial risk and potentially lower borrowing costs (Financial Synergies) • Increase operational efficiency and expertise (Operational Synergies/Cost Synergies) • Increase Research & Development expertise and programs (Operational Synergies/Cost Synergies)

5. MERGER ANALYSIS • Investment bankers put together merger models to analyze the financial profile of two combined companies. The primary goal of the investment banker is to figure out whether the buyer’s earnings per share (EPS) will increase or decrease as a result of the merger. An increase in expected EPS from a merger is called Accretion (and such an acquisition is called an Accretive Acquisition), and a decrease in expected EPS from a merger is called Dilution (and such an acquisition is called a Dilutive Acquisition). • A Merger Consequences Analysis consists of the following key valuation outputs: • Analysis of Accretion/Dilution and balance sheet impact based on pro forma acquisition results • Analysis of Synergies • Type of Consideration offered and how this will impact results (i.e., Cash vs. Stock) • Goodwill creation and other Balance Sheet adjustments • Transaction fees

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