My name is Ollie or Oliver, you can call me either.

I work at Financial Edge.

Financial Edge, as I'm sure you're aware, is sort of an education outfit, and we teach a lot of the big banks and other financial services providers.

And today you're getting the effects of your webinar, which has a bit of that content in it. It's part of a series.

Okay, so just in terms of context, so if we go to Felix, you'll see there's a series. Here's the analysis. Okay.

And then you can see there's a series of others.

And the reason I mention that is because, I think it was two weeks ago, Maria ran a session on M&A fundamentals, which many of you were enrolled in, and you may have already met her, my colleague Maria.

The reason I mention that is because I will do some things that overlap with that, and I will mention some things that have been covered in that session.

If you want to see that session, perhaps you missed it.

What you could do is you could say M&A, and see if I can get a bit quicker. There we go. M&A fundamentals under Topics, Felix Live. And if you were to click into that, you'd see my colleague Maria. Okay. And this happened about two weeks ago, and it was an hour-long session.

Okay, today's session is the analysis, which, like I say, has quite a lot of overlap.

I'm just going to copy in the link again.

Now, if we have a look at one of the models that I've got in the downloads here, so if I have a look at EA.

You can see that we're looking at an M&A model like you did two weeks ago.

You can see it's for EA, which is quite a famous transaction that's currently pending.

Okay, I say famous, it's well known, let's say, and that's because it's one of the biggest LBOs that's ever happened.

And you can see there's a bunch of analysis, including accretion dilution, which you talked about two weeks ago.

Okay, we've got sources and uses.

We've got the deal terms.

We've got things like ROIC.

We've got things like value creation and destruction because of the synergies.

So these are all things that we covered a couple of weeks ago.

When you talked with Maria, she showed you Tapestry.

Okay, and she said, "Right, let's have a look at this deal." And Tapestry was taking over Capri, and she said, "Okay, let's talk about M&A." What are the kinds of things that companies and boards of directors and other stakeholders talk about when talking about a deal? How do they advertise a deal to their stakeholders? And we talked about various things, which I'll create a list of.

So we said, right here we've got a strategic rationale.

And then down here we've got synergies.

And down here we've got EPS accretion.

We've got return on capital, or ROIC, we could call it.

We've got the deal terms.

Okay. Which might include things like the premium, cash up shares, that kind of thing.

We've got the financing package.

Which might include things like debt versus equity.

And then we've got things like debt to EBITDA.

And I'm mentioning this because it's revision from two weeks ago, and it also introduces the idea to anybody who wasn't here with us two weeks ago with Maria. I keep saying two weeks ago.

I actually can't remember if it was two weeks ago. It might have been last week.

If I'm getting that wrong, just correct me.

So what we're going to do today is we're going to fill in some of the blanks that were left from two weeks ago, and we're going to run with things a bit further.

Okay, so what we're going to do is we're going to look at these and we're going to say, "Were they covered by Maria?" If so, we're not going to spend as long with them today.

And then a couple where either Maria didn't cover them or where we could go a bit further, we're going to go further with.

Okay. And so this session will be about analysis.

We're not going to be building models.

There's a different series for that.It's about interpreting and taking the deal model and giving some sort of meaningful analysis that we can present to stakeholders about the deal to say whether it's good or bad.

Okay, so if we take a look at these one by one and say deal metrics or analysis, and say, right, were they covered? Well, yeah. We covered this two weeks ago.

So in the context of the Tapestry deal...

Where are you? There we are.

For example, the Tapestry deal, it's about creating new brands. It's about reaching.

It's about getting a new segment. It's about growing revenue in a way that you can't organically. Okay? It's about portfolio, brands, that kind of thing.

All right. Did we do synergies? Yes. Okay, what you did was you did the NPV of synergies versus the premium.

Okay. So what you did was you took the synergies, and we're looking at the EA deal now.

I know it's not Tapestry, but this is the deal we're going to be using for today.

And we discounted them at a sensible discount rate, and then we found out whether they stacked up against the premium, okay, and we decided whether it created or destroyed value, and we're saying destruction here.

Okay, so that was covered two weeks ago.

Okay, accretion dilution is one of the central outputs of an M&A model, and that was covered two weeks ago. Okay. What we would do is we would stack up all of the positive and negative impacts of the deal, adding the target net income, adding the synergies, deducting the financing package consequences, deducting the cash used interest, and then finding out whether the accretion or dilution happens.

Okay, so we've covered that. Great.

You also covered ROIC towards the end of the session.

Okay, so what you did was you said, "Right, how much money are we putting in?" Well, in this deal, we're putting in about $63 billion.

And then how much are we getting out? Well, we're going to have that as our NOPAT.

And what kind of efficiency does that represent? And you could then compare that to the WACC.

So you could say, considering we're spending 8% getting money, and we're putting that money to work, all right, well, that money's not being put to work very well, because what we've got is we've got a yield of about 3% on a cost of about 8%, so you would predict that this would be a poor acquisition.

Now, you covered that two weeks ago.

We also covered the model build.

Okay, so in this model, we've got how much are we paying? How does that stack up in sources and uses? Where are we getting our money from? And how are we modeling, say, the synergies? Do they come online immediately, or more sensibly, does it take a while for them to come online? So that was the model build.

And then we covered this as well, and we did that as sources and uses.

All right, so it feels like we've covered almost everything, but actually, we've got a couple of areas remaining, which are surprisingly complex and deep. And so it's good that you've covered some of this already, because we can spend some time talking about debt-to-EBITDA, debt versus equity, and the financing package, and doing some really in-depth analysis there.

We'll also be covering deal PEs, which Maria mentioned two weeks ago she wasn't going to cover, and we are going to cover them today.

Okay. We're also going to cover a more advanced model with three statements.

We definitely don't have time to build that, but we'll mention it, and I'll give you some resources to walk away with as well.

All right. Now, considering this is a ongoing series, it was important to introduce that way. Are there any questions or comments on anything I've been saying so far? All right.

Ah, yeah, very good. Okay. So, that is an excellent question and something that I meant to put in, and I did not.

Okay, so I'll upload this in a minute or when I get a minute. Right.

So all of this lot is covered effectively in two places.

Okay. The first one is here.Which is Maria's session.

And then the other place you could find it if you want more, how to put it, kind of static learning experience is you can have a look at Topics, Investment Banking, M&A, and then in Cash Deal.

Right now, I realize some of you may not want to wait for me to upload that, so I'm going to put that in the chat as well.

Okay, so excellent nudge there, Phil Sunday.

I'm probably saying your name wrong, which I apologize, but hopefully it's okay.

So that's a good question. If anybody's got any other questions, feel free to ask.

Close. Okay, good.

Yes. All right, so here we go. Now, what we're going to do is we're going to talk about a different deal to Tapestry. Okay? It's good because it sustains a bit more advanced analysis.

Okay, we're going to have a look at the EA LBO.

Okay, so what we've got is we've got this really, I don't know, industry shaking deal as such. Right? So we've got this announcement, and we've got a Saudi interest. The PIF is a sovereign fund run by Saudi Arabia, and it's in a consortium with some PE players, Silver Lake primarily. And they put together a financing package to take over EA, which is a gaming studio, for fifty-five billion.

And if you want to kind of be in the world of financial services, you need to keep an eye on this kind of deal, be aware of it.

This is the kind of thing that changes everything.

So I spent years saying mega deals above ten billion are super rare.

And we might look at a company which is thirty billion EV and say, "This could never be LBO'd. It's just too big." Well, this changes everything.

So we've got an LBO that's sitting at fifty-five billion, but this session is not about LBOs.

Okay, what we're going to do is we're going to say this gaming studio, we've got a bid of round about two hundred for EA.

So it's the current bid.

And right now I'm looking at EA, which you could find...

Let's find it.

So I'm just going to open up this.

Hello.

This one's being a bit naughty, sorry.

There we go.

And you could find it in EA M&A part complete.

All right, so let's simplify and say that the current bid by PIF is two hundred.

And then what we're going to do is we're going to imagine that we're Sony.

So maybe this is our client.

Sony is considering making a last-minute kind of interloper bid for EA.

EA is going to be bought by PIF, but it's not happened yet. In fact, I don't think it's going to really close predicted until some point next year.

Although there are some protections in place, it is possible, not likely, but possible, that somebody else could come in and bid for EA at this point. And this is what we're going to run.

So Sony is thinking about putting together a counteroffer for EA.

Because PIF has offered two hundred already, which is already a substantial premium to the unaffected share price of about a hundred and sixty or so from memory, Sony's going to have to up that.

And so we're going to run the model with a twenty percent premium on top of the current bid.

We'd have to offer quite a substantial premium because the current bid represents a fair bit of certainty.

And so for the shareholders of EA to push PIF away and say, "Hey, you, you've just offered us two hundred.

No, we're going to take this entirely new stakeholder now who we don't know, and we don't know exactly how it's going to pan out." For them to entertain an offer like that, they're going to need a fairly substantial premium, I reckon. And so twenty percent we're going to go with, and that means we're going to run this model with a two hundred and forty dollar bid by Sony on EA to tempt them away from the current bidder, PIF.

Now, what the model does is it does dilution, which we're not going to go through today.

It then crosses the bridge.

You've got some information about Sony.

Okay, and you've got some information about EA.Okay, and then we've got some key assumptions.

Now, somebody's asked what the premium is.

So the premium represents an additional value above current share price.

Now, if you're finding that difficult to understand, just see this as the current share price and ignore the current bid. Okay? That's a bit more complexity and a bit of fun, but ask her of the question. So Mohammed, just ignore the fact there's a current bid in place and just think the current share price is two hundred, we're going to offer more than two hundred, okay, otherwise people would just deal with each other, and so we're going to offer a premium.

All right, so back to the analysis.

We've got some more assumptions, which I won't labor too much at this point.

Okay. And then what we want to do is we want to get into sources and uses, which we covered two weeks ago.

And notice that right now the model is sitting at this really strange financing package.

All right. Now, we would like to get the level of equity to debt right in this model.

Now, when you've looked at models before, if you've looked at models before, say with Maria or in your other studies, it's quite common to see debt as a given figure.

Okay? So let's say we had an assumption that said debt percentage, and it said something like sixty percent.

Just imagine.

What we could do is we could reprogram this to just say sixty percent of the financing package is going to be debt, and then the rest will be equity.

Okay. And don't worry about how these formula are working.

That's not what we're studying here.

All right. Now, the problem with that approach is if we have that as a known figure, okay, this is problematic, and that's because we need to ask ourselves, how much debt is too much debt? So we've got a bit of a head scratcher on our minds now, and the bulk of the session will be us asking ourselves through analysis, how much debt can this entity manage? How much debt is too much debt, and how do we establish that? Then what we're going to do is we're going to talk about how that debt would evolve over time.

Now, you might recall that debt is a central interaction that we're going to have with a variety of stakeholders.

The primary stakeholder will be the ratings agencies.

Our job in this session primarily will be to keep the ratings agencies happy.

All right. Now, in terms of a learning kind of journey as such, what we're going to do is we're going to do the following.

We're going to say why choose debt? Then when we've chosen debt, we're going to say how much debt? Then when we've chosen the debt, we're going to say, how will the debt evolve over time? And those steps will each need an analysis.

The first analysis we're going to do is deal P/Es, which you didn't cover in the other session.

The next analysis we're going to do is deal debt via debt to EBITDA.

And then the next analysis is much broader, and it might involve three statement advanced models.

Okay. So everything so far has been a very long introduction into the world of M&A and this model, and we're about to dive into the analysis. I've given you a lot of context there, and depending on where you are in your studies, you may be sitting there feeling pretty comfortable or your head may be spinning a little bit.

I'm going to pause now and see if there's any questions on anything I've been saying so far. And then after that, in a minute or so, we're going to dive into the debt over EBITDA question, or excuse me, the P/E question.

Yeah. So Nick, you've asked what's a deal P/E? That's almost like my nomenclature for it.

And yeah, I don't think you'd hear it called that very often.

What we're looking at is...

Let's find it.

We're looking at this lot here.

Okay, so it's P/E analysis.

The reason I call it deal P/E, and again, that's kind of my version of it, is because when you look at P/Es in a wider context, say I grabFelix, and have a look at Tapestry itself.

And then I go to valuation.

We often find P/Es kind of about companies, and that is the primary use of P/Es is almost like trading comps for valuation purposes.

What we're going to do now is something a little unusual.

We're going to use P/Es to examine financing, and I tend to call that deal P/Es.

But like I say, that may not be something you've seen before.

Okay, so that's an excellent question.

I can't see any other questions, so let's with that dive into deal P/Es, as I call them, or P/E analysis. And you're welcome.

This is actually quite hard to understand, and there's an alternate way of thinking about it, which in a way is easier.

Now, if we have a look at FY1, the way a P/E works is it's a price, okay, over earnings.

So if we take that to be quite literal and we say, right, the acquirer, let's go find the acquirer's price.

So that's Sony's price. Well, Sony appears to have a share price of $21.

Let's lock that.

Okay, let's go and find Sony's earnings in FY1.

Here's Sony, and their earnings in FY1 appear to be 1.22.

I won't lock that.

Now, if I copy that to the right, you can see the evolution of their P/Es.

So their price to earnings in FY1, you would pay $17 for every dollar of earnings.

In isolation, this tells us nothing, by the way.

So as a piece of analysis, that's kind of fun, but it tells us nothing right now. We need to do some other stuff.

All right, now let's do something a little unusual. Let's do the acquisition P/E.

Now, the way you can interpret this is the acquisition is EA Games.

So that's the gaming studio that's being acquired.

Let's go find their price.

There's actually two prices in this model.

There's the, let's call it the unaffected share price.

It's a little bit of a stretch of that term, but their current share price is $200.

Or we've got the deal terms, which are $240.

Now, this is the one we're going to take, and we're going to say you would have to pay $240 to get access to, and let's find the EPS of the target.

So you're going to have to pay $240 to get access to $8.59 of EPS in that year. And note to Simon, lock that.

All right, so what you're seeing here is that EA is trading higher than Sony.

Okay, so EA is trading higher than Sony.

Now, what this enables you to do is a piece of analysis.

To sustain that analysis, it's quite nice to do a second upside down bit of analysis.

And just bear with me on this one before you ask questions.

If we take the reciprocal of what we just calculated and then turn it into a percent, and then we do that for both entities.

Now, we've just converted P to E into E over P, so this is an earnings yield.

Okay, now there's two different ways of thinking about it, and let's look at both.

So let's run with the analysis for this way. What does the P/E tell you? Okay, so what does the P/E tell you? What is the analysis here? Okay, here we go.

In FY1, you can sell earnings in Sony for $17 or thereabout.

Let's unpack that statement.

The price of a share is $17 and gets access to EPS of $1.

That means if I issue shares in Sony, I will raise $17, and then the bearer of that share has an implicit promise that they'll receive dividends and capital appreciation of about $1, because remember, the EPS is all theirs.

Now, in the same year, in FY1, you can buy earnings in EA for $28.

So if I'm looking at EA and I want to access $1 of their EPS, I'm going to have to pay $28 to get access to that.

Now, what does that mean? This means a share for share is a bad idea.Okay.

Now, the other way we can do it is we can do this.

We can say, if you put a dollar into EA, it will yield you 3.6.

But if you put a dollar into Sony, it will yield you 5.8.

So if Sony is thinking about where to put its money, it's better to put its money into itself than EA.

So EA is a bad acquisition from a share-for-share point of view.

It costs too much to raise equity for Sony to use that money to buy equity in EA.

Share for share is a bust.

We would predict this deal would be dilutive on a share-for-share basis.

Okay, I'm going to pause because people often find that quite difficult to swallow, so if there's any questions there, let me know.

And just to be clear, we haven't done debt PTE yet.

Yeah. There's a different way of saying that.

You could interpret this as their cost of equity.

So if Sony issues a share that's worth a dollar, they're going to have to pay that shareholder 5.8%, and then if they raise a dollar and then put it into EA, they're going to yield 3.6%.

So yes to the answer to your question, or you could think about this as a cost, and this as a yield.

The problem with this analysis is you can think about them in 10 different ways, so it can get a little really confusing, but hopefully that's helpful rather than confusing.

It's a good question. And if anybody's wondering who I'm talking to, it's a question in the Q&A, which are very welcome.

Okay, let's do the yield or cost on the debt because people find this much easier to swallow. So the deal debt is costing 5%, okay, but you get a tax break, and I'm looking for... Here it is. Sony's marginal tax rate.

So their effective cost of debt is 3.8%, and what I'm going to do is I'm going to lock all of that because we're going to assume that cost of debt doesn't alter over the period.

All right. Now, this might help reinforce some of this that I've already been talking about.

So if I issue debt as Sony, it's going to cost me 3.8%, and it's going to yield the bank 3.8%.

If I then put that money to work in EA, so I've raised a dollar via debt, and I'm now putting it to work in EA, it's going to yield me initially 3.6, and then eventually it's going to yield me 4.2.

So what this tells me is, debt is initially not cheap enough.

By year three, it's cheap enough.

The deal should be accretive.

And we can then flip that on its head if we wanted to and find this really funky idea of debt P/E.

Okay? So if I promise a dollar worth of my earnings to the bank, it will raise $26, and then I can put that $26 to work in EA, which is a bad deal in year one, but in years two and three, it's a pretty good deal.

Okay, so debt should be okay eventually.

Okay, again, I'm going to pause there because that's a pretty major piece of fairly rare analysis, but it gets us into the idea of why we're attracted to debt.

So if there's any questions, let me know.

Otherwise, we will move on to debt over EBITDA.

Okay, so we have examined why we might want to choose debt. Okay? Why choose debt? It's cheap.

We're attracted to debt, and we're going to try and load up the deal with as much debt as possible, and we need to ask ourselves now how much debt is too much debt.

We've established that the deal should be accretive on a debt basis, and that the more equity we put in, the worse an idea it's going to be. We could, in fact, test that.

Can you see that right now we've got entirely debt in our model, and it's first a bad idea turning into a good idea.

If we just force a zero there for a second and make it a purely equity deal, you can see it just totally torpedoes the dealWhat we're seeing here is a reinforcement of the analysis that we performed down here, which is that if we do a share-for-share exchange entirely, this deal is a bust.

Whereas if we totally debt fuel it, it's a marginal success.

That means that we'd better load this deal up with the maximum amount of debt possible. Now, we'd love to run the model with just 100% debt like that, because we know it's a success, right? But that won't fly, and that's because our key stakeholder is the ratings agency, and they need to, in discussion with us, Sony, our client, figure out what the right level of debt is so this whole thing doesn't collapse.

Okay. And that's what we're going to do up here.

All right, here we go.

Stop me if you're not ready.

Okay, so the aim of this is to raise the overall pro forma net debt to LTM EBITDA to two and a half turns.

Okay, so how have we got to two and a half? We've been in discussion with the ratings agencies.

They look at EA, and they say, "EA is a really great company.

It's very trustworthy. It's got great history.

It's quite safe." We think Sony, excuse me if I said EA, apologies, Sony can take two and a half turns of EBITDA as long as there's a really good demonstration that they're going to remove that down.

Okay, so this will be a negotiation that's happening between Sony, its advisors, and the ratings agencies.

Now, what we've got to do is we've got to establish the initial debt to EBITDA, and then bring it up using the deal debt to two and a half.

We can then plug that deal debt in, which will then populate this here. Can you see it's looking for that number? Now, here we go. The acquirer net debt, let's find it.

Okay, where are you? We've got Sony, and we've got debt, but they've got loads of cash, so their net debt is actually negative.

We've got the acquirer EBITDA, which is there.

And so we've got net debt to EBITDA of minus 0.7. So can you see that Sony on its own would be able to get what appears to be about 3.2 turns of debt? And that's because 3.2 would rise it from minus 0.7 up to 2.5. And we could take that to be the answer, but unfortunately, that's a bit simplistic.

What we're going to have to do is we're going to have to say, actually, it's the whole group that's being judged here.

So we need to actually consolidate, in our minds, EA into Sony.

So here we go. We've got the target net debt.

And I'm looking for the target's net debt. Oh, there we go.

We've got debt here, and then their cash. So they've got a negative net debt as well.

Apparently, that's quite common in this industry.

Or maybe these are just cash-rich companies.

We've got the target's EBITDA.

And so we've got the target's net debt over EBITDA, so that they're actually even more safe than Sony, and that means that actually, as a combined entity, they may be even able to borrow more than we thought just now.

Okay, so let's do it on a combined basis.

All right, so the combined net debt, let's add them together.

All right. Now, that's if we left the two companies as they are.

Ah, Phyllis Sunday, and sorry for the name thing again, but we're going to do that right now, so well done. That's an excellent comment.

Okay, and you're living in the future.

We're going to refinance the target's net debt here.

Okay, so if we left the entire entity, the group, undisturbed in terms of debt, that would be our net debt right there.

But we're actually going to refinance the target's net debt.

So we're going to reverse out this one here, and that gets us to a combined figure there, which is a little confusing, so we'll spend a little bit of time talking about that, and let me show you my formula as well.

All right, so we've refinanced the target's net debt, which means we've actually got rid of the target's debt of 1,800.

And so it seems a bit odd that we've ended up more indebted than we were, but that's because in refinancing the target's net debt, we've actually used target cash, which means we're more indebted.Okay, so this is an unusual situation where the net debts are negative, and that means as part of the deal if we have a look at the source and uses, we're actually using the target's net cash as a source.

That cash is going away into the hands of target shareholders, which means immediately post-acquisition, we've actually got a net debt figure that's worse than you would expect.

Okay, so good comment, Phil Sunday.

All right. Now, let's add the two EBIDTAs together.

So combined LTM EBITDA.

Okay. So acquirer and target.

Let's find the combined, and there we go. It's going to be somewhere between the two.

So if we added a couple more decimals there.

Okay, it's actually not ended up between the two because we've used the target's cash. Excuse me. So that was a little bit faulty analysis, and so it's a little bit more complex.

All right. What we're going to do now is we're going to lift that number up into that number.

So if we take that and minus that, you can see that we can add three point two turns to the pro forma structure, and we should ideally end up at two point five immediately post-acquisition.

And that then represents three point two turns of combined EBITDA, which means a mighty fifty billion-ish of debt, which now turns up in the financing package and means the balance of debt is high and the balance of equity is relatively low.

And what we're effectively doing is we're pumping up debt at the absolute maximum according to the ratings agency's discussions.

And that means that we'd better be pretty confident we can bring that down again, otherwise the ratings agencies will give us a horrible downgrade, and life will become hellish for us.

Okay, that's a major outcome, and that transforms our model from one where we just put a debt percentage in like we did two weeks ago, to inferring a debt percentage from negotiations with the ratings agency and having a bit more of a smart look at the financing package.

So if you've got questions there, let me know, otherwise we'll move on and we'll do our third analysis, which is how will debt evolve over time? Okay, if you are typing, keep typing. Oh, Mohammed.

Yeah, you can find that in this download.

So Mohammed's asked where I can find the completed model.

So I've got quite a few tabs opened, so let me just see.

Yeah, so in this link that I pasted in a couple of times, you'll see this EA M&A full.

All right, so we've got the acquisition debt, and let's have that locked.

Okay, we've then got the acquirer net debt.

Okay, so that'll be the combined net... Oh, excuse me, the acquirer i.e.

the pro forma net debt.

A little bit confusing, that wording there.

Right. So that means that the overall net debt will be as follows.

Okay, we can then find the pro forma EBITDA, no synergies.

So we have that up here.

And then this is kind of moment of truth time. Hooray.

That says two point five, so we've done our job properly.

Can you see this whole analysis was moving towards a situation where post-acquisition, considering all of the effects of the deal, we would end up with the magic two point five, which the ratings agencies negotiated with us.

Now, I'd love to be able to say over time, that will evolve as follows.

Okay? But that will almost immediately fall apart and you can see why.

Okay, the first three lines are working, but the pro forma EBITDA is grabbing from our analysis here.

So let's instead grab it from the two entities, and then copy to the right, and there we go.

Now, we're showing the credit ratings agencies that we can get our net debt under control, but let's say the ratings agencies query this, and they say, "This analysis is not deep enough." They'd probably pick holes in this because they'd say, "Well, what, you're just going to sit around and not do anything at all with your debt? You're not going to repay it at all? You're not going to accrue any cash during that period?" That seems oddYour EBITDA at least is moving around, so that makes sense.

But your model is fairly light, to say the least. So I don't know.

Has this model taken into account deal effects and things like that? I'm not sure I trust this model, really.

And so although this isn't a bad way of demonstrating the reduction in debt-to-EBITDA, we would probably need to go a bit deeper, which is where we might start looking at our advanced models, which is where we'll finish up.

This is as far as we're going to go with EA, and well done if you were able to follow along.

Before I move away from EA, I'm just going to pause and see if there's any questions before we move on to Bayer-Monsanto, which is a beast of a model.

Okay. So we're done with EA, and let's say we're now looking for a way to deepen our analysis so we can demonstrate to stakeholders the evolution of the debt, the evolution of our cash balances.

We might also want to make a more sophisticated view of, say, return on invested capital.

To understand what's going to happen with this lot over time, you would need a proper model.

So knowing what your invested capital is going to be over time.

Can you see we've just assumed it's going to stay stable? That's pretty low-level analysis there, and not bad for an introductory model, but not great if we really want to demonstrate accuracy.

So what we need to do, if we wanted full accuracy, and given the time available, we're just going to look at the full model.

It says Advanced M&A, Bayer-Monsanto Full.

And we're not going to do any building, we're just going to look at this, which is fine. This is a model that takes, if I teach it in class, a whole day, just to give you some context.

Now, what we're looking at here is two companies, Bayer, Monsanto.

This is a famous deal for all the wrong reasons.

Okay, so we've got Bayer and Monsanto.

You can tell from the graphics that they're into pharming, and you can see they're not very well-regarded from some of these graphics. People see their products as poisonous and bad for the environment.

They do things like weed killer, and there's a famous one called Roundup, which involved a lot of litigation and problems.

Now, we're imagining that we're in about 2017, and we've got two companies, Bayer, which is a European company, buying Monsanto, which is an American company.

And what we're going to do is, in this M&A model, we're actually going to the same outputs as we always have done. There's accretion dilution.

Deal P-to-Es.

Debt-to-EBITDA.

Okay, and then lurking around here somewhere is ROIC.

I've probably just missed it somewhere.

But there's return on invested capital as well.

But what we're going to do in this model is we're going to say, actually, we would like a much better view of where the EPS is going to be.

So not just adding the two companies together, but other effects as well.

So we want the pro forma net income.

We also want a much better view of where the debt is going to be, and you can see we're predicting a major debt paydown within the period of this acquisition, which is common. You're not just going to sit around like we did in EA, okay, and just let the debt fester. You're going to get busy trying to pay off the debt.

And then we're going to have a much better view of, say, EBITDA as well.

Okay. Now, how are we going to do that? What we're going to do is we're going to take the acquirer and put together a full three-statement model.

We're then going to take the target and put together a full three-statement model.

And then by the miracle of consolidation, we're going to put together a three-statement model for the combined company, which will sustain a much better analysis.

So rather than doing a miniature model like this, if you wanted to go further, what you would need to do is do a full income statement, balance sheet, cash flow statement of the sort you'd see in a three-statement model.

Now, because this is very time-intensive and demanding, if you're on the job and you're looking at a target in initial phases, you're almost certainly going to do something like this, which is effectively like a one- or two-statement model model.

But if you're really in the weeds and you want to find accuracy and be able to demonstrate to your stakeholders what your debt-to-EBITDA will be over time, which was critical for the Bayer-Monsanto deal, and they got it quite wrong, then you're going to want a full-on three-statement model of this kind.Now, if you're interested in that, like I say, it takes much too long to look at today, but you can find that and the three-statement model under Topics, Investment Banking, M&A.

And it's one of these two, I can never remember which one.

Not this one.

That one.

Okay, so this is effectively Bayer and Monsanto that we're looking at here, and so let me copy that in as well.

Okay.

And so we've got that link there as well, and I'll put that in as well.

Okay, so we're getting towards the end of the session.

I'm just going to have a look at the Q&A box, see what's going on.

Yeah, so Mohammed has asked, what assumptions would you need to make this analysis deeper? So from a debt point of view, I've effectively answered that question here. So this is the analysis that you need to decide how much debt is enough debt or too much debt.

But then if you wanted to go even deeper, you'd need a three-statement model to be able to say exactly where your debt's going to end up and where your debt to EBITDA is going to end up.

I suppose the answer to your question is how much time do you have available and how much accuracy does your team and your stakeholders demand? Because lots of people run models of this level and are absolutely happy with them because they might be looking at multiple targets. Whereas if you've got one target and you're really now trying to prove to, say, the ratings agency that you can handle debt, you might want to produce a much more in-depth view.

Simple answer to your question is the sorts of assumptions you can find on the Assumptions tab of both of these models.

Okay.

I can't see any other questions, but feel free to ask if you have them.

In the meantime, I'm just going to see if I have anything else I want to say or anything I want to kind of tidy up.

No, I think that's all good. All right.

So let me just summarize what we've done today.

We had an intro where we saw the sorts of things that stakeholders say about M&A.

We used Tapestry, which was the company that Maria used two weeks ago to do that. We said there's lots of things that were covered that you can have a look at using the links below.

We then ran mainly with debt, and we did some really deep analysis on that, saying, okay, how much debt is too much debt? Why do you want debt in the first place? And we then ran with that at two levels.

One, the intermediate level, and then we mentioned briefly in passing, okay, the deeper level, and we said that it's possible to do a much deeper analysis on a three-statement basis.

All right. That brings us bang on the hour.

So well done for your work and attention and your questions.

Always makes a session like this more fun.

Hope you have a really nice day and a nice weekend.

If you want to stick around and ask me questions, feel free to, but that's the end of the session now. Okay? So thank you very much, and if you are logging off, have a nice day.