# Accretion

Given: Acquiring firm buys Target firm for 100% cash for \$20 per share. Acquiring Firm Pretax Kd= 5% EPS= \$1 NI= 150m Tax Rate= .3 Target Firm EPS= 2.5 NI=25m Shares Outstanding = 10m What is the accretion per share?

proforma EPS = proforma NI/ proforma shares proforma NI = Acq NI + Target NI - Aftertax Int. Kd Aftertax Kdebt =new debt issued * Kd What is new debt issued? 20*.05?

this is what i gather… Post transaction: New debt: \$20*10m = \$200m Interest expense: 5% of 200m = 10m EBIT for combined company: (150m+25m)/(1-0.3)=250m Additional interest expense=10m Pretax income = 250m-10m = 240m After tax income=240*0.7=168m Number of outstanding shares=150m (none of target company). 168/150=\$1.12 Accretion of (1.12-1.00) = 12cents. also, you would have to account for debt issuance cost amortization, transaction fee, any additional fees to reach a truer EBIT number.

bm_chicago Wrote: ------------------------------------------------------- > this is what i gather… > > Post transaction: > New debt: \$20*10m = \$200m > Interest expense: 5% of 200m = 10m > EBIT for combined company: > (150m+25m)/(1-0.3)=250m > Additional interest expense=10m > Pretax income = 250m-10m = 240m > After tax income=240*0.7=168m > Number of outstanding shares=150m (none of target > company). > 168/150=\$1.12 > > Accretion of (1.12-1.00) = 12cents. > > also, you would have to account for debt issuance > cost amortization, transaction fee, any additional > fees to reach a truer EBIT number. yep. Offer Value = New debt * target shares = 20*10 = 200 PTIE = OV * Interest Rate = 200 *.05 = 10MM ATIE = 10MM * (1-MTR) = 10MM *.7 = 7MM PF NI = Both NI - ATIE = 175 - 7MM = 168MM PF EPS = PF NI / PF Shares of Acquirer PF EPS = 168 / PF Shares of Acquirer PF Shares of Acquirer = NI/EPS = 150/1 = 150 PF EPS = 168 / 150 = 1.12 PF EPS - Standalone EPS of Acquirer = 1.12 - 1 = 12% accretion

why do we account for debt issuance cost amortization when we paid int expense?

Interest expense would be the additional interest expense for raising debt, paid to the bondholders. Debt issuance cost includes transaction fees (M&A fees, banker fees, financing cost, etc) that come along with the refinancing/capital raising… they will be capitalized on the balance sheet and amortized over 10/15 years or the life of the debt tranche… i am talking about the items individually… ofcourse, you will be issuing enough debt to include paying for the transaction fee. but you would show it separately on the bs.

Is this in Level 3 material ? Which book is that ?

no. this is some ibanking material from TTS. i posted on the level 3 forum because L2 has valuation concepts.

What’s TTS?

Training the Street.

Thanks … I thought I was reading the wrong material.

TTS is the best… i use their macros everywhere…!

i use the WST macros. LOL

whats WST? What do they have in their macros set? hmm, i might be interested if youre willing to share…

Actually debt issuance costs only include financing fees which are capitalized at the point of the transaction as an asset, and then amortized over the life of the debt (as non-cash interest expense). M&A fees are not included in this. M&A fees are capitalized as part of the purchase price and effectively increase goodwill on the pro forma entity. there is no P&L impact (and no impact on EBIT) from M&A fees. bm_chicago Wrote: ------------------------------------------------------- > Interest expense would be the additional interest > expense for raising debt, paid to the bondholders. > > > Debt issuance cost includes transaction fees (M&A > fees, banker fees, financing cost, etc) that come > along with the refinancing/capital raising… they > will be capitalized on the balance sheet and > amortized over 10/15 years or the life of the debt > tranche… > > i am talking about the items individually… > ofcourse, you will be issuing enough debt to > include paying for the transaction fee. but you > would show it separately on the bs.

Regarding treatment of M&A fees, just bear in mind that this could change soon. The good people at the FASB have an exposure draft out which will change many purchase accounting rules. My understanding is that this new guidance could be released later this fall. Likely changes include: 1) Expensing M&A fees through the P&L of the combined company rather than capitalized as part of the investment cost. 2) Restructuring charges at the target company would also be flushed through the P&L of the combined company. No more treating them as an “assumed liability.” 3) If it’s an equity deal, the measurement date for the value of the equity consideration would be moved from the announcement date to the close date. 4) Capitalizing IPR&D!! 5) I think treatment of contingent consideration may change as well. Obviously there won’t be any effect on cash flows, you’ll just have to tweak your model.

ya - that draft has been around for the past 2 years ago…

bankingbaby, youre right… m&a fees arent capitalized, theyre part of the purchase price …