M&A Case Study - Sources and Uses
- 02:58
How to do a sources and uses of funds analysis for an acquisition model.
Transcript
So next we're going to do a sources and uses of funds, which is standard in any acquisition model. The first thing we're going to do is pull in the acquisition equity value, and we can calculate this just from above the key numbers.
So we are enterprise value is 86 and we're gonna sum any other assets.
And then what I'm going to do is I'm gonna subtract any existing debt, which is dead and debt equivalence there. So the acquisition equity value is gonna be about 87 billion. Then we've got some fees and we have an assumption for fees, which is 1% of the enterprise value, not the equity value, the enterprise value. So I'm gonna go back up and calculate or use the acquisition enterprise value is pretty chunky fee bucket of about 861 billion. And that we a blend of not just advisory fees, but also financing fees. You're gonna have to repay the target debt. Normally there will be a change of control clause, so we're gonna have to repay that 521. And then the total uses of funds is gonna be about 89 billion. Now for the financing, what we're going to do is assume that part of the financing is gonna be funded by any cash on the balance sheet, because if there's cash on the balance sheet, we can use that immediately to repay some of the debt. So we're gonna put the target cash as a source of funds because as soon as we've acquired the business, we can use that amount of money. Equity financing, we're gonna calculate based off our assumption, which is 70%, and this is going to be based off not the total uses of funds, but the acquisition equity value. And the reason for this is that the fees have gotta be paid in cash and you're going to have to refinance debt dollar for dollar using cash. So you're only going to be able to issue shares to satisfy the the needs of the selling shareholders not to pay fees or refinance debt. Now, in some situations, maybe you could do a direct equity issue, but generally speaking, you're going to have to use debt to finance fees and refinance debt. So this means our debt financing is effectively gonna be a plug. We'll take the total uses minus what has been funded by equity minus what has been funded by the target's cash balance, and that will give us the amount of debt financing in the deal. And we'll need to check that against the leverage ratios to make sure that the combined leverage in the company doesn't exceed normal metrics of what we would want to achieve. We've done our sources uses, and that's kind of a control panel for the deal. Now what I want to do is go down and do the combination on the income statement.