Hi everybody.

We'll just give everyone a few seconds to join in before we get going for this session.

Hope you're doing well this Friday afternoon.

It's nice and sunny here in London, uh, on the outskirts of London, least where I am. Hope you're having a good day where you are based at the moment.

Um, in terms of getting access to the materials, um, they should be below the screen on the website that we're looking at.

If you can't see them there, I'll just drop 'em into the chat function now so that you can see them.

Uh, this is the website to go to. If you go to this location, you'll be able to see the five files.

Now we're not gonna be looking at all five files there today.

The one that you really want to grab is just the MA modeling Complexities Park complete file.

That's the one file that we're gonna be looking at to take us through the next 45 minutes to an hour.

Um, looking at highlighting or investigating some of the issues we're gonna face when we're thinking about how to look at consolidation accounting from a m and a perspective.

That's what we're gonna be looking at.

Um, we just have that one Excel file to look at. So it's the part complete file that you need to pick up.

If you wanna grab that, that'll be a great way to start.

For those of you just just joined, if you go to the link here, I'm just putting into the chat function.

You'll be able to see the, uh, content there.

It's the part complete file, the modeling complexities part complete file.

Okay, looks like we've got a pretty consistent number. We're gonna dive into the content.

If you grab that Excel file, it should look somewhat like, uh, I'm gonna get on the screen in a moment.

There we go. So it should be somewhat like this that you can see on the screen.

Now, um, in terms of how the session's gonna run, if you do have any questions, either drop me into the chat or into the q and a. That should work as well. If you drop any questions in there, that's absolutely fine.

If you wanna unmute yourself and ask a question, that's great from my perspective as well.

No problem with that either.

Okay, so hopefully we can, uh, see this Excel file on the screen.

It'll start off here on the welcome page.

If you go to the m and a model with complexities tab, then uh, if you're looking at the part complete version, we should see some of this completed already and let's just make it a bit bigger so you can see what's going on.

What we're gonna do is we're gonna work through and build this model.

Uh, it is a somewhat generic model, but hopefully it'll give us the idea about how we might need to model our m and a analysis within a, um, consolidation perspective.

So I'll have a bit of a chat through the beginning, some of the complexities we might find here and how we're gonna deal with them.

Uh, and then we'll build all the way through to our, uh, accretion dilution analysis.

If you have questions, please drop 'em into the chat, drop 'em into the q and a function.

All good. In terms of uh, communicating with me, that'll be fantastic.

If you have just joined, I'll drop it in there one last time. That's the link to get to the materials. Great. Okay, so let's dive in then.

What we're looking at here is we're looking at a transaction where we're trying to make the model as flexible as possible to deal with all of the input uncertainty that we might have.

And one of the key input uncertainties we're gonna be dealing with is differences in terms of accounting treatment with regards to our acquisition percentages.

So we might need to apply full consolidation if we get more than 50% of the shares of a company technically if we get control.

But we're gonna assume that's been delivered by the percentage ownership.

We might need to use the equity method if we are just getting between 20 and 50%. Generally the way that we might look at that, technically it's where you have significant influence.

A seat on the board may be that might derive that for us. And if we have less than 20%, we might just have to use cost accounting and we want the model here to be able to deal with all of that complexity in one go.

So if you're just joining us, uh, the material should be through that link.

Uh, it's the pot complete version of those files that we're gonna look at.

Okay, so in terms of this model, let's just walk through the uh, deal, uh, assumptions to begin with.

We've got most of this built already.

If you can't see this built, then you're probably in the empty version rather than the part complete version.

There is a full version to look at as well for you.

Um, so let's go through what we've got here.

We've got our acquisition share price. This is of the target company.

We've got the acquirers share price. This will help us with the EPS analysis, uh, accretion dilution analysis eventually.

And the number of new shares we're gonna be creating.

The shares outstanding. This is the basic shares outstanding of the target company of 31, let's say million.

And there are some employee stock options out there as well for 5 million.

And those options have got a strike price of three.

Now our first calculation here is calculating the net new shares from the options been exercised.

Um, where we have employee stock options, they generally vest if there is an acquisition.

So that acquisition price of five, well I'm gonna pay three to buy shares worth five.

That will hopefully make some sense for us.

The net new share calculation here, uh, calculates the net new shares that would need need to be created to create those 5 million new shares where we're assuming that the cash that we receive, we just use that to repurchase shares on ourselves.

So 2 million shares to get us down to our diluted shares outstanding.

If we then look at the acquisition purchase price for a hundred percent acquisition, we're gonna take that acquisition share price and the diluted shares outstanding multiply through. But then we're gonna deduct from this our first complexity we could say around tax deduction of options.

Now this only applies for non-qualified options, but depending on the jurisdiction, where we are based, if we have non-qualified options, what that um, allows us to do is really get a benefit as the acquiring company if there is a exercise of employee stock options in the target company.

Now the way this works is that if you exercise those employee stock options as the employee, you are most likely gonna have to pay some tax on the gain that you make.

Now that taxable gain, um, depending on again the jurisdiction that you're in, it may well be the case for those non-qualified options that actually the government says, well I'm not really getting this.

I'm not getting a benefit for anything that that is happening here.

It is just that the acquiring company is ending up with dilution of their ownership and the tax is created from that, but it's not really a tax benefit to the government.

As a result, given assuming that they are non-qualified options, then you are allowed as the acquiring company to take that as a deduction from your tax liability.

So the tax expense that is being paid into the government by the employees from the exercise of the option can be reclaimed by the acquiring company.

So the government's in a net neutral position basically.

So that's why we are deducting the value of the employee stock options tax expense.

And you can see that it's the tax expense 'cause we're looking at the gain that is being made here.

So this employee stock option is the gain made by the employees if they exercise, that's two per share across the 5 million shares. So that's 10 million of a gain that the employees are making.

They've gotta pay tax at 30% down in row 19 on that.

So that is a 3 million expense that employees have to pay for the government.

And as a result the acquiring companies can claim that back.

So this is reducing effectively the acquisition price 'cause yet we've gotta pay the a hundred seventy, a hundred sixty five to buy if it was all of the shares.

But we get a corresponding benefit of reducing our tax liability.

So this is the net cost of acquiring a target company.

Okay, here's where we start to make this a bit more flexible. In our model, we've got an acquired stake that is an input assumption and we have our acquisition equity cash flow if we're only acquiring 80% as our starting point.

So we're gonna start off by looking at 80%, but we're gonna try to make the model as flexible as possible based on this acquisition assumption.

So that gives us the acquisition equity value on the 80% stake that we're taking on.

We also want calculate our net debt.

Now the net debt numbers here are coming from the targets balance sheet. Further down we've got from row 45 onwards the targets balance sheet in column D.

And here we've got their short term and long term debt giving us swift take off the cash of five to give us 45 as their net debt.

And we've calculated the total enterprise value for the business of 207.

And the reason we're doing that is 'cause that's typically what our fees are based on.

Okay? So we need the total enterprise value even though we're only acquiring 80% of the target company.

Good. That's our starting assumptions.

Now the first thing we're gonna need to do is build our sources and use of the funds table.

We've got this built already 'cause it'll save you just having to watch me type through the numbers.

Um, but where do we need money from? Well, we're gonna need money to buy the target company shares.

Uh, and we're also gonna have to pay some fees based on the enterprise value.

Now we've made a simplifying assumption in this model to say that we're not gonna need to refinance the next debt of the target company that just make this model a little bit easier to see, but we could easily have that in there as well.

So that's our need for cash or value at least.

So we need 130.6 from somewhere.

And we've got another assumption here in terms of how much of that is gonna be equity financed.

The equity financing as the acquirer here, we're a listed company.

We can go out and create new shares in ourselves and give those to the existing target company shareholders as part of the acquisition purchase press.

This though is gonna be limited to 60% of the acquisition price.

It's not the total use of funds because the maybe investment bank that these fees need to be paid to, they don't want shares in their client, they just want cash.

Okay? So the equity limiting factor here, equity financing is only applied to the acquisition price.

The target company shareholders may be willing to take shares in the acquiring company, okay? The balancing figure then is our debt number and that is new debt financing we're gonna have to take on to get enough money to get our value to buy the company and pay for those fees.

Okay? That's all sorts of uses.

Again, um, not too much technically complex here.

Um, just standard sort of e and a analysis.

Where things start to get a little bit more complicated is when we get down to our goodwill calculation.

So for the goodwill calculation, we're gonna be adopting the IFS approach here, or partial goodwill where we're calculating the goodwill just on the bit of a target company that has been acquired.

Okay? So the goodwill calculation is gonna be based on the purchase price, not the 100% acquisition equity value.

We are then gonna deduct from this the tangible net assets acquired.

Now what that basically means is we need to match these up in terms of percentages. So if it's 80% of the shares being acquired, we are wanting to only include for our partial goodwill IFRS approach only 80% of the net assets as well.

So you can see that's the C 14 80% number.

But we need to apply this to the target companies acquired net assets at fair market value.

Now you can see if go down the balance sheet, we have net assets or at least assets of 1 95 and liabilities of 80.

So that's 115 of net assets.

Well that's just the same as the equity net assets. Assets.

Net of liabilities is the same as your equity just to make sure your balance sheet balances.

So we've picked up the net assets being 80% of D 60, which is the shareholders' equity, but we've deducted the targets goodwill.

Now the logic here in an acquisition is that this target has goodwill because it has acquired some subsidiaries previously.

Goodwill though is just really a balancing figure.

It's the difference between what is being raised as financing and what we're getting onto our balance sheet in terms of assets and liabilities from that target company.

And if we're paying more to buy the company than it has as net assets, the difference is goodwill.

That's, there's loads of good reasons for that.

Mainly because we value companies based on future profitability as much as current assets on your balance sheet.

So you know that mismatch is just a accounting quirk that needs to be there.

But if you're buying a target company, does that goodwill really exist? I'm not sure. Are we really buying goodwill in that target company's subsidiaries? Went it bought it? Is that an asset? We can generally say genuinely say we are acquiring and the accounting rules basically say no.

So we're just gonna ignore it. We're gonna assume that this isn't here.

That will reduce our assets by 50.

It will reduce our shareholders' equity by 50 as well.

And as a result, our goodwill calculation is based on the shareholder's equity minus the targets existing goodwill.

Now to some degree, if that goodwill really genuinely does exist, it just rolls up because what we're doing is we're making this net assets number smaller, which makes this goodwill number bigger.

So in the end it kind of comes out in the wash basically.

Um, but we get goodwill here for this transaction of 77.6.

This is only the goodwill and the bit of the company that we have bought only the goodwill on 80% of the shares at the moment.

Okay? We're gonna get into the consolidation accounting in a second, but before we get there, we want to make this model flexible to any percentage ownership stake that we might choose to uh, adopt for this acquisition.

At the moment we're saying we're buying 80% of the target, but if we were to only buy 40% of the targets and maybe model what might happen to our earnings per share as a result of that, we want this model to be flexible enough to deal with that.

So, um, what we've got over here is a set of flags essentially.

And these flags either turn on or off based on which accounting methodology we're gonna be using.

Okay? We're gonna use share percentage as a proxy for um, control.

So if we're gonna have more than 50% of the shares up here in C 14, then we need to use the full consolidation approach.

And this flag is saying if C 14 is greater than or equal to 50%, then we just have a one here.

And if it's not, we're less than 50, then we just put a zero.

Okay? But the cost side of things gonna do the same thing here.

We only use cost accounting, which is basically maybe cash down and asset up on your balance sheet, uh, or whatever other form of financing we're using up and asset up.

Um, we're only gonna use that if we have less than 20% of the shares in the target company.

So if we're more than a greater than 50%, we use consolidation.

So a one if that's true, but the cost accounting, if C 14 our percentage ownership stake is less than 20%, then we put a one in this cell, otherwise a zero.

And if these are both zero, so we're less than not less than 50 and not greater than, sorry, not less than 20 and not greater than or equal to 50, we must be in the middle.

And as a result, we are gonna need to use the equity method.

So whatever our ownership stake, you're gonna end up with just one one in one of these three cells.

We're down to 15%.

We just get one in the cost accounting, okay? So the idea here is that this allows us to flip the accounting from the accounting under the cost method to the equity method, to the full consolidation approach depending on what our ownership stake looks like. So a fully flexible model dealing with all potential outcomes that we might face.

Okay? We are pretty close to getting into the consolidation now.

Uh, so let's just dive down and see what we've got left.

We've got some assumptions for synergy cost savings.

We've got some assumptions for forecast and historical earnings per share for the acquirer and the target. Let's just put net income now because it's there just multiplied through by the weighted average shares outstanding to get the historical and forecast net income for the acquirer and also for the target.

Okay? And what we're gonna look to do now is to build up our balance sheet so that it's flexible to our accounting scenario that we need to use dependent on our um, consolidation methodology.

Okay? So we've got our balance sheets down here.

We've got our targets and acquirers balance sheet on our standalone basis, okay? We're gonna assume here, we'll talk about it more when we get there.

Um, but let's go through and build this, assuming that we're gonna use full consolidation.

'cause the full consolidation accounting is the most complicated one.

And if we can do that, then we can flip it quite easily into the equity method or the cost method, which a acquisition are pretty similar.

Okay? So what we wanna do for any consolidation, if we're using the full consolidation approach, if we've got more than 50% of the shares in the target, then we need to make sure that we are bringing in the assets and liabilities of the target company on a line by line basis.

Well, that basically means is to get your group cash number.

We just take the acquirer's cash and the target's cash and just add 'em up.

Okay? There might be a number of adjustments that we've gotta make as we go through this as well and we'll pick those up as we go through.

But we'll have a look at those, uh, as and when we need to.

So what we wanna do in this combination kind of group accounts and just be clear, proforma just means if the transaction happens.

So if the transaction went ahead, what would our balance sheet, our group balance sheet look like, what we'd need to add up the acquirer and the target and any adjustments that we might make to it.

Okay? Now this is gonna apply across essentially every line for our assets and every line for our liabilities and equity as well.

Okay? We're gonna add up to get totals, but this basic premise is gonna work for all approaches.

However, we only do this line by line consolidation, adding up the acquirer and the target if we're using the full consolidation approach, okay? If we're not using the full consolidation approach, then as you might be able to see here, we just have a single line cost investments and for equity method investments.

So we only want to add in the targets numbers on a line by line basis if we are using full consolidation, if we are looking at an ownership stake above 50%.

So what I'm gonna do is I'm gonna multiply 46 here and then hit F two again and go and grab the consolidation.

Full consolidation flag.

I'm gonna hit F four to lock onto it, okay? And I'll show you that formula there as well.

So what this formula is doing is it's saying we're gonna add up the acquirer.

The acquirer's always gonna be there post acquisition.

We're gonna add only in the target number if we're under the full consolidation approach, which we are at the moment.

If we're multiply 'em by zero, if we end up less than 50%, then it'll just go away.

And then we also add on any necessary adjustment as well.

Okay? This is really gonna apply for every number as we go through so we can make this flexible to all of our calculations.

Okay? I'll go through and build that in a second.

But basically that premise is gonna work for all of these numbers as we go through. There's nothing extra to add in relation to that.

So if we're comfortable with that concept in terms of making this flexible to the full consolidation, the next thing that we're now gonna go do is, next thing we're gonna have a look at is going through our standard consolidation accounting steps.

And there really are three steps to do our standard consolidation accounting.

The steps are gonna be, let me just grab a blank sheet.

Okay? So the steps we're gonna need to think about in terms of getting our full consolidation done, lemme just put this on the screen for us.

Okay? So in terms of arriving at our full consolidation, the steps we're going to use are, firstly we're gonna need to eliminate the target company's stockholders equity.

Lemme write that out for you in full.

So eliminate target company's stockholders equity.

The next thing that we need to do after that is deal with the financing of the transaction.

So any new debt, any new equity that we're creating, any cash that we're using and the, excuse me.

So our financing adjustments.

And then the final step we're gonna look at is any, what we might refer to broadly as step ups or step downs where we need to adjust a value based on the transaction.

This is gonna include dealing with goodwill, okay? Now those are the three steps that we need to do. That's all we need, really need to do to get through to our, uh, consolidated accounts.

So we're gonna need to eliminate the target company stockholders equity first, okay? Let's just go and do that. Okay? So in my adjustments column, I'm just gonna say that while the target company stockholders equity won't exist, if we're gonna be using the full consolidation approach, okay? Now the only thing we've gotta be careful with with this is that when I get down here, we've already adjusted the D column for the full consolidation approach.

We only are therefore gonna be including it if we use full consolidation.

So we've only gotta exclude it again if we're using full consolidation, okay? So just put the um, G 19 flag apply to this elimination of the stockholders equity.

We only need to do it if we using the full consolidation approach.

Okay? So that just won't be there. Now once we get to the um, consolidated number, okay, next step was to deal with financing.

Okay? So what financing we got to deal with here? Well the financing we're looking at is go back to our sources and uses.

We've got new debt that we've taken on and we've got some new equity that we've gonna be raising as well or like issuing those shares to the target company shareholders.

So we've gotta deal with both of those.

There's no refinancing of the target's net debt.

So we're gonna just assume that that rolls forward into, into the group position.

But we are gonna have to say, well we do have new long-term debts.

It's gonna be long-term debt because we're gonna assume that we buy this company for the long term.

So we're gonna bring in the long-term debt.

We don't need to adjust this for our capital structure for the accounting treatment.

'cause whatever the debt we need to raise to get the cash to buy the target will be there even if we only buy 30% or 15% of the target.

Okay? And then the new shares that we're creating, we're gonna have to add that to our equity balance.

Okay? So this is us creating brand new shares to issue to the target company shareholders.

Okay? Now that's getting us pretty close, but one final thing just to be a little bit careful with in relation to this is that we do have one income statement effect that happens on the day of acquisition, which is these fees.

Now these fees we're essentially borrowing money to finance, but then we're not showing the second side of it anywhere, okay? And the second side of these fees is it is gonna reduce our profitability.

Okay? So we do need to account for these fees, they're already in the debt funding bit.

So our debt balance is gonna be higher because we're taking on more debt financing for this.

But then paying the fees is an expense essentially on day one of the transaction.

So there's another adjustment we've gotta make here in the equity section to reduce retained earnings essentially by the fees that we're gonna have to pay, okay? Now those fees are gonna need to be paid whether it's a full consolidation or not.

So we don't need to adjust that. Okay? Great.

So we've eliminated the target company stockholders equity, that's this bit here, only if it's full consolidation.

We've then brought in the equity financing and deducted the transaction fees.

We've also brought in the new debt financing as well. Okay? So we've adjusted for the financing side of things and the last adjustment we've gotta make for a full consolidation is now to think about those step up and step downs. This is where we're adjusting what their balance sheet values look like based on what things are for our acquisition.

Now you may well have to make a what's called a step up in relation to something like pp e.

The pp e is reflected on the target company's balance sheet based on maybe cost minus accumulated depreciation.

However, we haven't made any assumptions here for those step ups.

If you did, you just need to add the balance on here and essentially reduce it out of uh, goodwill. Effectively, the logic being that when you're buying the shares of the target company, really you are buying the shares of the company, but it gives you access to everything the company owns.

So implicitly you're buying all of the assets of the target company at their current market value.

You'd expect that to be reflected in the purchase price of the shares.

If there's a lot of land in here, maybe that was being shown at cost, then you'd expect the, the purchase price of the land when the company bought it wouldn't be reflected in your acquisition price of the company.

Instead, it would be the current market value of the land.

It would have an impact on your purchase price of that company.

So we might need to make some adjustments for that.

It will just be a a reduction essentially against goodwill.

Okay? We don't have any of those. Just to simplify things, what we do though have is goodwill, okay? And we said in relation to our adjustments, what we're gonna look to do is to apply this same formula here, which is to add in the target company.

If we're operating under full good, well if we're operating under full consolidation accounting, well we need to say I wanna get rid of that as well though if we're operating under the full consolidation and have to add this goodwill number in. So I wanna get rid of this 50 and then I do want to bring in the goodwill that I've just calculated.

Okay? The goodwill calculated as 77.6. Okay? So we wanna get rid of the target company's goodwill.

You can see that we excluded the 51 already in the calculation of the goodwill and that net assets number.

By reducing it, we end up with a bigger goodwill number.

We also gotta make sure that we don't include it for consistency in our consolidation calculations. Adding across. So remove the target company's goodwill, add in the goodwill number that we've calculated and you can see that what we're adding on here is that 77.6 on a net basis to the goodwill that is already there in the acquirer.

But again, we only wanna do this if we're working under the full goodwill or rather the full consolidation approach.

So we wanna put that flag in there again, okay? So multiply through by G 19.

So we make these adjustments if we're under full goodwill.

Now if you buy only 30% of the target company, then there might be some goodwill effectively in that acquisition price, but we don't see it separated out because the equity method only ever shows a single value for the acquisition or the um, investment that we've made in this company where we use the equity method.

So goodwill, we wrapped up in that single value effectively.

So we only ever show this goodwill adjustment if we're operating under the full consolidation approach.

Okay? We're pretty much there now.

Um, what I'm gonna do is just go through and build the rest of the balance sheet, assuming that we're operating under our full consolidation approach to prove that it works.

And then we'll make the adjustments that we need to make to get the uh, equity method and then the cost approach to work as well.

So let's go through and do that. Our calculation up here was just to add up the acquirer and the target if we're using full consolidation and any adjustments, okay? Now I can apply that to all of the balances that I've got for the assets, but all of my assets I'm adding across.

So you can see for the short term assets, I've got the net of the acquirer and the target and for pp and e, the net of the acquirer and the target.

Those are still now in our enlarged group once we bought that target company.

And you can also see the goodwill number has increased by the 77.6 that we said was the goodwill from this transaction that is adding onto the 200 that we already had as the acquirer.

Okay? That'll give us our total assets. Okay? So we've got nine, 12.6, okay? We do exactly the same thing.

I'm just gonna copy that formula and apply it to the liabilities.

Okay? So let's just take that value and apply it as well.

Take the formula rather than the formula text that I'm revealing for you and we can apply that to every row here.

We end up with more than just the net of the long-term debts. We're taking on some extra debt financing for this transaction and that will give us our total liabilities, okay? And we can do the same thing for our equity balance.

Now this is where we might be able to spot that we are missing something, but I'll just pop it in here just to, just to demonstrate why we need this extra balance.

Okay? If we go through all these calculations, we would see that or our balance sheet doesn't balance, okay? If we need to add up our liabilities and both of our equity balances would be able to see if I get rid of that negative sign that our balance sheet doesn't quite balance, okay? So the balance sheet doesn't balance, okay? And there's a really good reason for this, okay? What I've done is I've brought in all of the assets of the targets, all of the liabilities of the target, none of the equity because we got rid of that, okay? So all of their assets and liabilities have come in 100% of them.

Even though we've only acquired through this new debt and equity that we're raising 80% of the shares of the target company.

So I brought in a hundred percent of the assets and liabilities.

But what's gone out, the extra financing if you like, is just for the 80% that we've acquired, right? So what we need to account for is the fact that not all of the uh, subsidiary is owned by the parent company and therefore for the benefit of the parent company shareholders, there is some value in this subsidiary that's part of our group.

Now we're showing a hundred percent of the assets and liabilities 'cause we control them all, but some of it is owned by somebody else.

Okay? So we're gonna need to say, well if somebody else owns some of the assets and liabilities of a target company, so somebody else owns one minus the percentage ownership, okay? That's 20% of the well we've only brought in their liabilities and their tangible assets.

Okay? So it's only 20% of the tangible net assets that I need to include here.

And the tangible net assets are the shareholders equity minus the goodwill number.

So it's 20% of the 65 that we're bringing in here.

And luckily that sounds like it's gonna be 13, which is exactly how much my balance sheet is off by, okay? We're essentially allocating some of the assets and liabilities that we brought in that are owned by these other 20% shareholders in the target company.

And we're in the equity section down the bottom of the balance sheet here saying who owns those.

Now again, this only needs to be there if we are operating under the full consolidation approach.

So let me just go and grab that flag again that we only include this if we're operating under full goodwill. So we're essentially saying that somebody else owns some of these net assets, okay? It's based since we're using partial goodwill, the goodwill that we added in here, the 77 extra is the goodwill on 80% of that subsidiary that we bought.

So the goodwill on the bit owned by the non-controlling interest, the other 20%, the shareholders, we don't need to include that goodwill here 'cause we haven't included their goodwill in the assets.

So we don't need to allocate it down here within the non-controlling interest either.

Okay, good stuff.

Now we've gotta balance sheet the balance, that's great if we're operating under our full consolidation approach.

So this is great if we have more than uh, 50% of the shares, but we want this model to be fully flexible so that it can deal with any adjustments that we might make where we have less than 50% of the shareholding.

Now in terms of the accounting, it's pretty straightforward.

Okay? If we only buy 15%, 10% of a target company, then broadly you can say your cash goes down and your asset goes up. That's how it would work. Now, if we're not financing it with our own cash, if we're financing it with more debts, then we're gonna say well our asset goes up and we've got our debt liability going up. That'll keep our balance sheet in balance or our asset go asset goes up and our debt and equity go up and keep us in balance.

Okay? So all we need to show in here for this cost is the cash that we're spending, okay? So that equity purchase price, okay? The fees we're gonna deal with in a direct equity adjustment. So don't have to worry about that here. Um, multiplied by the flag to say we need the number if we're using the cost approach and that's it.

That really is that straightforward.

Lemme just label it up so that I can show you what the formula looks like.

So we just take the money that we're spending to buy the shares if we buy less than 20% and multiply it by the flag so that that value just appears as an asset.

We will also have the debt financing and the increase in equity financing of its equity finance in there as well. So they'll balance off. Okay, good.

The equity method basically is the same, at least on day one.

Okay? The formula, lemme just put that in so you can see what the formula looks like. Let's gonna be exactly the same formula in that we take the equity purchase price if we were to buy between 20 and 50% of the shares of the company and we need to multiply it by the flag for the equity method and that really is it.

Okay, we should now have a model. Fingers crossed that stays in balance no matter what our ownership stake looks like.

So let's go and double check that whilst we're here.

If we get maybe a 40% ownership stake, you can see that we are now using the equity method. That flag makes sense. We're between 20 and 50, we still have the purchase price coming through here and the fees to pay.

We are still raising some debt financing to pay for it and issuing some new shares to those 40% shareholders in the target company to buy their shares in exchange for their shares.

And let's go down and see what we've got.

Firstly, good news, our balance sheet balances. Okay? Secondly, what do we have here? Well for cash, just the acquirer's cash for the short term assets, just the acquirer short term assets, okay? But we have a new line for the equity method investment just shows up as a single line item, sometimes referred as a single line consolidation.

We just have the acquirers, PP and E and the acquirer's goodwill.

Same for short term debt, other liabilities and long-term debt.

We have no non-con controlling interest 'cause we're only bringing in the bit that we've bought to 40% of the shares of the target.

And in terms of equity, we're only adjusting for the new shares issued minus the fees.

Essentially reducing retained earnings.

And also if we go one step further and knock this down to below 20%, so we just have a 15% ownership stake, the flag updates. So we show the cost approach.

We're still splitting this, partly raising new shares and partly raising new debt financing.

But again, you can see that we have all the numbers being just those of the acquirer except for the cost line.

Okay? It's the same the whole way down.

And it's the same adjustment here that these two are the debt raised to finance the acquisition and the debt raised to pay for the fees plus the equity raised net of the retained earnings. Essentially adjustment for the fees being paid.

So everything working there for us, okay? This model is now fully flexible. We've got our fully flexible opening balance sheet, which is entirely sensitive to what our financing might look like.

Why do we wanna have a look at this? Or we might wanna consider our debt to EBITDA multiples.

Okay, well to get our consolidated numbers, our consolidated debt is gonna be short-term and long-term debt on a group basis, okay? And our EBITDA is gonna be our consolidated EBIT, okay? Uh, which uh, we don't have but we do have given to us EBITDA numbers for the acquirer and the target individually as well.

Okay? Now this isn't quite everything because we're saying that if the transaction goes ahead there will be some synergies as well.

So let's not forget about the synergies in this uh, debt capacity calculation.

We said the synergies worth 5 million each year.

So that'll get us up to a debt to EBITDA multiple take on our debt divided by our ebitda. That'll give us the multiple.

Now this doesn't look uh, worse, it looks in fact better through the acquisition because you take on a limited amount of debt financing.

But we're still showing all of the synergies.

Uh, whereas um, probably let's make an adjustment there.

We only want to really show the synergies if we have control of that company.

And as a result the synergies really should be multiplied by that flag as well.

So let's just multiply it through by the full consolidation flag, okay? So you only get the synergies benefit if you get all of the company and can control their cost structures.

So what we're saying here is that if we use the full consolidation approach where by 80% of the shares short, we get an increase in the group's EBITDA, but a substantial increase in the group's debt level is gonna lead to a increase in the debt to EBITDA for the acquirer to what it looks like afterwards. Partly because the target companies debt to EBITDA is higher and partly because we're taking on more debt financing, um, to facilitate the acquisition which offsets against the synergies that we get through that as well.

Okay? Final point we're gonna have a look at then is just to build our income statements.

Again, we want the income statement to be fully flexible here.

I'm gonna build year one first.

I'm gonna make it flexible and then we can just copy across to the right afterwards.

So in terms of the income statement, we're looking forward to the future.

Uh, the way that the income statement's gonna work is basically the same as the balance sheet in that we add everything up on a effectively line by line basis, but only if we are using the full consolidation approach.

Okay? So we're always gonna have the net income of the target company, of the sorry acquiring company that's always gonna be there and it's gonna be column D 'cause we're looking forward into the future.

Okay? Let's make sure I actually grab the net income number, not the earnings per share.

So the acquirer's net income number next year is what we're looking for here as our starting point.

Okay, good.

Now we only add the targets net income in, in full if we're using the full consolidation approach.

So targets net income we add in next year's forecast if we are under full consolidation, Okay, I've logged onto it, I wanna copy to the right and still be able to see it.

The synergies, again, we get those synergies, it's five each year into the future, but we only get the synergies if we're operating under full consolidation and have control of that target company.

So again, multiplied through by that G 19 value.

Okay? So great we've made some cost savings if we control the target company, but by making those cost savings, we've improved our profitability before tax.

And if we improve our profits before tax, then we're gonna have to pay more tax.

So we take the tax rates, it's back up here in the assumptions tax rate of 30% F four to lock onto it, gonna multiply that by the synergies and multiply it by the flag.

'cause we only get that if we have full consolidation and control of the target company and flip it around because it is extra tax we've gotta pay reducing our profitability.

So that is the tax rates times by the synergies, cost savings times by the flag.

So it only turns on if we have control of the target company and then flip it around to be negative.

Okay? Next adjustment that we've got, which is gonna be there under any approach that we choose to um, adopt, is that we're gonna have the additional interest to be paid here.

Okay? So our additional interest is gonna be the debt funding multiplied by the interest rate and again when it's got the assumptions for our interest rate of 5%, Okay? And gonna flip the sign around on that to make it negative, okay? Multiplied by minus one to make it negative.

So this will reduce our profits, push them two businesses together. We get both companies net incomes, but we have this extra interest to pay as well.

And then we've gotta take into account the tax consequences of that.

Okay? So if we have extra interest to pay, it makes our profits smaller and as a result of that, smaller profits means less tax to pay.

So tax rate times by the extra interest multiplied by minus one to flip the sign around again.

So that's 0.8.

Okay, Good.

So we always have more debt, we always have more interest to worry about here under any acquisition scenario, the synergies and the targets net income only get added in if we're under full consolidation, that's why we've got the G 19 in there, Okay? I'll leave the equity method out for a second.

But if we're looking for the net income for the acquiring company shareholders, we then have to say, well this is a hundred percent of the target's net income and a hundred percent of the synergies in the target.

Well some of that isn't gonna come to us as the acquiring company shareholders.

Some of it is for the benefit of the target company.

So we're gonna need to take their share.

Okay? So one minus the 20% or one minus the 80% stock holding, okay? And multiply it by the target company's, uh, net income, Okay? If we're only getting an equity state, there's gonna be no synergies to worry about and no tax on, no synergies to worry about as well.

Okay? We're only gonna need this if we are using the equity method.

So again, we've gotta apply the right flag to this, that equity method flag.

Okay? Sorry, Not equity method NCI.

Okay? And again, lock onto the flag so that it stays there no matter What. Okay? We're gonna assume that they don't get allocated the synergies, just to be crystal clear on that, we're not gonna allocate the synergies to them.

We're just gonna allocate to them their bit of the, um, net income.

We're making the synergies in our group, not in their individual subsidiary.

Okay? And that'll be everything for the pro forma net income.

It's gotta add everything up above.

And that'll get us to the pro forma net income number.

Now I've left the equity method out here.

The way the equity method works is that we just take our stake where it's between 20 and 50% and multiply it by the target companies net income.

So we only bring in our bit of their net income, okay? That's what the equity method approach does.

But again, we've gotta apply this equity method flag here to make this work for us.

Okay? Now before we copy this across to the right, there's a zero here 'cause we're not under the equity method.

Before I copy this to the right, just worth checking to make sure that all of the, um, locking with our dollarization F four is in the right place before we copy it to the right.

We have that for the flags to begin with.

We have that for the tax on the synergies and the tax rates.

We need to also lock onto these both because this is the amount of debts and the interest on the debts and also the tax rate.

Again, okay, for the equity method, we need to look at the ownership percentage staying constant, but the profits will change.

And for the non-controlling interest, the ownership stake isn't gonna change, but the non-controlling interest number will do as well.

So the net income that we're bringing in will change as well. So that should work for us, okay? Uh, we can have copy this across to the right for all of the scenarios and we can see we're getting numbers coming in across all of them.

They look like numbers that we should be getting to and let's just double check it again to make sure that it's working.

If we go down to a 40% stake, 40% acquisition stake, does this get us through to not bringing in targets net income? Great. Not bringing in the synergies, great.

Not bringing in tax on synergies, but instead we bring in the equity income line.

We do have the tax, uh, interest and tax effect on the interest from the debt financing of the acquisition.

We don't have any non-con controlling interest.

So that all looks like it's working perfectly. Great.

Okay, let's go back the 80% just to finish this analysis all off for us to get down to our EPS analysis, okay? So far we've got to what the net income will be if the acquisition takes place on these terms.

What I then need to figure out is, well what would the earnings per share be on a proforma basis if this transaction took place? Well, to get there, I need the proforma number of shares to get there.

We need the existing number of shares in the acquirer that's in that earnings calculation.

Okay? Let me put the formulas in just so you can see them all.

We then also need to put in the new number of shares.

Now, if we are financing part of the acquisition with new shares, we've said already how much value we're gonna deliver through those new shares.

But we haven't said how many shares we're gonna need to create to deliver that value to the target company shareholders.

But we know what the acquiring company's share price is.

So to deliver 77.8 of value where each share is worth $18, we've gotta divide the 77.8 by 18 and that will give us the number of new shares. We've gotta create the 3.4, 3.4 million shares.

Now, again, I haven't locked on correctly here to this. We've gotta lock onto both of these to make this work good, okay? And that'll give us 4.3 million shares in extra in every year.

Add those up to give me the proforma weighted average shares outstanding.

And then for the proforma earnings per share, it's the proforma net income divided by the proforma number of shares.

Now is that a good number? Well, we don't know yet to determine whether this proforma earnings per share is good, whether this transaction is good for the acquiring company's shareholders or not.

What we've gotta go and do is compare it to what it would be on a standalone basis and on a standalone basis, we've already got our forecasts for the acquirers earnings per share on a standalone basis.

This was up in our earnings forecasts, right? So we can just drag those across to make the comparison and you'll able to see over here, that's okay, great. They're all higher, okay? Our earnings per share is higher.

If this transaction were to go ahead with an 80% acquisition.

To quantify it, you just take your pro forma earnings per share and divide by the acquirers earnings per share and take one away.

We've got some percentage formatting on there already and if I copy that to the right, that will tell us that we're getting about a 4.3% accretion increase in earnings per share if this transaction went ahead compared to it not going ahead.

So that sounds like this is gonna be a, a good deal for the target company.

Sorry for the acquiring company shareholders.

It's definitely gonna be a good deal for the target company shareholders because we're gonna offer 'em a control premium to convince them to sell our shares, their share source in the first place.

It's also gonna be probably a good deal for the acquiring company's management team because they might get some sort of, um, integration bonus.

But the question remains, is it a good deal for the acquiring company shareholders just because the company's bigger? Just because your, uh, net income goes up from one 30 ish to one 50 ish.

Is that a good deal or not? Well, it depends on how many new shares you've gotta create in response to that.

And we're saying here that on net basis it is a good deal, it is gonna be beneficial for the existing shareholders of the acquiring company to go through this acquisition.

Okay? That's been a fairly whistle stop tour through some of the complications around our m and a analysis and building a consolidated balance sheet to work through that analysis.

Hopefully that was okay though and it made sense as we went through it.

Uh, that's everything from me for today. Hopefully that was useful. Don't forget the solution files, the full versions of the file there as well. So if you wanna look at the other two tabs and, uh, there's uh, recordings behind this in Felix as well.

Uh, if you wanna go to the topics menu, you'll be able to find that within the investment banking side.

Otherwise, thanks very much for your attention.

If you have any questions, please drop into the chat. Otherwise, have a good rest of your day and hope you're looking forward to the weekend, not too far away from you now.

And I'll see you again on another le one of these in the near future.

Thanks very much. Thanks very much.

No problem at all. Have a good day.