Modeling Acquisitions and Buyouts

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Overview

Prerequisite: Modeling Financial Statements aka Financial Statement Modeling

MBA ACCT-GB-3344 specializations:

• Accounting
• Financial Systems and Analytics

Undergrad ACCT-UB-0044 concentration: Accounting

This course is highly relevant for bankers, private and public equity investors, lenders, corporate finance professionals, project financiers, and consultants. The conceptual, practical, and technical knowledge gained in this course can give you a significant competitive edge during your interviews, internships, and jobs.

The salient topics covered are as follows:

• Efficient use of Excel to model various types of waterfalls such as debt waterfall and payments waterfall to various groups (sponsors and investors) in LBOs and private equity deals
• Avoiding and handling iterations
• Various measures of free cash flow depending upon the type of analysis -- valuation, credit risk analysis, credit waterfall
• Credit modeling for various types of debt and the credit mindset, including downside protection and derivatives
• How to model an acquisition including step-ups, deferred taxes, and accretion/dilution
• Project finance
• An intuitive understand of securitizations
• Share-based compensation
• Foreign currency transactions and translations

Prerequisites and system requirements

• Modeling Financial Statements or Financial Statement Modeling
• You need to be in the following systems:
  • Albert
  • NYU Brightspace
  • If you are a non-Stern student, Stern automatically creates a Stern account for you when registering for a Stern course. All class emails are sent to your Stern email, not NYU email. Please forward your Stern email to your NYU email.
  • I do not control your access to dgode.stern.nyu.edu. It is linked to whatever Stern has entered in the class roster. I cannot override it.
• If you are blocked from accessing these systems, please ask the administration to expedite matters. Given the complexity of these systems, I cannot manually add you to any system.
• Only registered students can attend. I cannot override this NYU rule.

Help and Office

• Me: dgode@stern.nyu.edu, 212-998-0021, Office: KMC 10-86.
• Teaching assistant: Please check NYU Brightspace

Materials and Course Design

• I use my materials. Therefore, there is no required textbook, and you need not purchase anything.
• Classes are not videotaped unless there is a special session.

Assignments

• The assignments count towards 20% of your grade. They will prepare you well for the final.
• The assignments appear as tests on Almaris. I may update the deadlines as the course progresses. The deadlines shown at Almaris are the correct deadlines.
• Some assignments are short; others are long. Please manage your time.
• NO EXTENSIONS will be granted for any reason except medical or family emergencies. If you have religious or personal conflicts, please submit the assignments early. The related materials are covered well in advance of the assignments. Please do not email me to request extensions unless you have a medical or family emergency.
• You can collaborate with others while doing assignments.
• All assignments are mandatory. After the first day of class, you can view the online assignments at http://www.almaris.com/assess/ using your official Stern email (no aliases) and the most recent password emailed to you by Almaris. The Almaris password is different from the Stern password. To retrieve the password, use your full email with the domain name as it appears in Brightspace. The domain name could be @nyu.edu for some of you, while for others, it could be @stern.nyu.edu. I do not control this mess.
• Assignments are marked “late” if you do not meet or exceed the passing score described below before the deadline. There is no additional penalty for lateness other than the low score.
• Assignments have a “passing score” of either 100% or less than 100%.
  • I set the passing score at 100% if you should ace the assignment. In reality, there is no passing grade. Whatever you get on your last attempt is your final score. That is, you are graded on accuracy but not the number of attempts. There is a difference between “passing” and getting full credit. If you get 70/100 on your final attempt, you “pass,” but you do not score a 100.
  • I set the passing score of less than 100% on a few assignments if you might not get every question right. Any score above that score is rounded up to 100%. For example, if the passing score is 90%, and you get 93%, your score is rounded up to 100%. I do the rounding up in a separate spreadsheet. You will see only the raw score online.
• Almaris is not affiliated with Stern in any way. It is offering these tests to Stern at no charge.
• Almaris staff is not authorized to extend deadlines under any circumstances. Only my TAs can do that. Almaris staff will reply to your emails only if they pertain to technical issues with the Almaris system. Please contact Stern IT for technical issues with your network.

Attendance and penalty for missing classes

Requiring attendance is necessary for several reasons. First, many of you misjudge how much you miss out on learning when you miss classes. It is difficult to catch up once you miss a class. Watching a video (if available) is inadequate as it is cognitively far inferior to paying attention in a classroom. Second, less than 25% of the students who miss a class watch the video (if available). As a result, they are lost in subsequent classes, which provides wrong signals to me as an instructor. Third, there is diminished classroom interaction and poorer quality of class discussion if you are absent. Fourth, you do not get enough feedback if you do not work through the questions I pose in class. Fifth, I lose the feedback on how much you are learning with fewer questions in class.

The policy below will be in effect only after the add/drop period.

Without mandatory attendance, as much as half the class can be absent. Therefore, though I dislike doing this, I penalize absences. I understand that there are valid reasons for absences. If you anticipate being absent for good reasons, please email me well in advance. You can enter "Excused" on the attendance sheet described below to avoid the penalty if I approve. If you miss a class due to emergencies and cannot tell me in advance, do not panic. Take care of the emergency first and then email me. I will permit you to change the "absent" to "excused." But, if you miss a class without a valid reason, there is a penalty, as shown below.

For sections meeting in 150-190 minute sessions, you would lose one grade (A to A-, A- to B+, B+ to B, B to B-, and so on) for EVERY missed session unless you were explicitly excused via email. Thus, if you miss two class sessions, you would lose two grades, and so on.

For sections meeting in 75-80 minute sessions, you would lose one grade (A to A-, A- to B+, B+ to B, B to B-, and so on) for EVERY TWO missed sessions unless you were explicitly excused via email. Thus, if you miss four class sessions, you would lose two grades, and so on.

Please sit in the same seat in every class and display your name tags. After entering the class, please mark yourself present in the first 20 minutes in the OneDrive sheet (link posted on OneDrive after the add/drop period is over.) You will be marked absent if you are more than 20 minutes late unless it is because of factors beyond your control (traffic, subway, interviews running late). You will also be marked absent if you leave the class early unless you have my permission or get it afterward. You will get an F in the course if you are caught cheating on the attendance sheet.

Exams and Grading

• If you have a qualified disability and require academic accommodation during this course, please contact me directly. I will arrange a separate room/time for you.
• Grading
  • Please read about the penalty for missing classes above.
    
  • Assignments: 50%. You need not get a full score on the assignments; any score above 80% is considered a passing score.
  • Final exam: 50%
• Your exam will consist of one or more spreadsheets. Your score on each spreadsheet will be max(attempt1, attempt2 - 7, attempt3 - 14, attempt4 - 21, attempt5 - 28).
• If you want us to grade your incomplete or incorrect spreadsheet manually, submit it within FIVE MINUTES of the end of the exam.  Do not email it; look for File Exchange in the left-hand menu bar on NYU Brightspace. If you submit the spreadsheet for manual grading, you would be considered to have used up your five attempts. Therefore, your maximum score on that spreadsheet can only be 72/100 due to the penalty for multiple attempts.

Important computer tips for the final

• DO NOT WORK ON A SPREADSHEET WITHIN A BROWSER. Save the spreadsheet to your desktop, work on it, and save it periodically. If you navigate away from the spreadsheet in a browser, ALL YOUR WORK WILL BE LOST.
• Restart your computer before the exam to minimize problems.
• Bring an external mouse with a scroll wheel to speed up test-taking. Do not waste time using the trackpad or the internal mouse.
• Maximize screen space by hiding the Excel ribbon and browser menus. The more of the screen you see, the faster and more accurate you are.
• Bring a computer with as big a screen as possible.
• Organize your computer files and designate a directory where you will be saving your exam files.
• Do not get an unfamiliar computer.

Schedule

• A detailed document is provided in the course materials. It lists the sequence of topics, related pages from the materials, related spreadsheets, and related assignments. The outline below is a summary.

1. Acquisitions: Identifying and modeling synergies

Revenue-related synergies

• Joint customers
• Joint channels
• Complementary products
• Access to new geographic markets
• Speed of build-out
• Shared branding
• Marketing talent
• Blocking competitive entry

Expense-related synergies

• Redundant resources
• Improved capacity utilization
• Management talent
• Access to cheaper debt
• Tax synergies: Covered briefly; details covered in the tax course

2. Acquisitions: Modeling consideration paid and acquired assets

Consideration paid

• Components of purchase consideration
  • Cash paid
  • Debt assumed
  • Equity issued
  • Contingent consideration: Equity-classified and liability-classified earnouts
  • Replacement stock awards issued to employees
• Premium paid
  • Understanding premium over book value versus premium over market value
  • Modeling control premium

Modeling acquired assets

• Trading, available-for-sale, and held-to-maturity securities: Difficulty of valuing Level III securities
• Receivables and allowances: Misleading days of receivables and allowance ratios after an acquisition
• Raw materials, work-in-process, and finished goods inventories: Misleading gross margin and days of inventory ratios after an acquisition
• PP&E: Distorted accumulated depreciation to gross PP&E ratios after an acquisition; distorted PP&E turnover after an acquisition
• Favorable leases and contracts
• Intangible assets
  • Brands and trademarks
  • Customer relationships
• Deferred tax assets are covered in the next section

Modeling acquired pre-tax liabilities

• Accounts payable and accrued expenses: Misleading days payable after an acquisition
• Deferred revenues: Understated future revenues, misleading days of deferred revenues
• Unfavorable contracts

Modeling deferred tax liabilities and assets

• Book basis versus tax basis in acquisitions and resulting deferred tax assets and liabilities

Goodwill

• What goodwill represents

3. Acquisitions: Drivers of accretion and dilution

• Modeling the effect of fresh-start accounting on post-combination financial statements
• Drivers of EPS accretion/dilution
  • Synergies
  • Relative pricing
  • Accounting step-ups
  • Integration costs
• Commonly used non-GAAP measures and their pitfalls

4. Leveraged buyouts: Modeling changes in capital structure

Identifying LBO targets

• Borrowing capacity
• Superior management and cost controls
• Capital structure optimization and investor groups with higher risk tolerance
• Debt market considerations
• Target pricing

Modeling sources of financing and their waterfall

• Bank debt
  • ABL facilities
  • Revolving credit facilities
  • Term loans A, B, and C; Balloon, bullet, and amortizing loans
  • 2nd Lien loans
• Public debt
  • Senior notes
  • Senior subordinated notes [See advanced structures such as PIKs and converts below]
• Equity contribution
  • Rollover equity
• Cash on hand

Modeling exit strategies and multiples

• Exit via an IPO
• Sale to a strategic buyer

5. LBO: Modeling advanced debt and equity structures

• Modeling Payment-in-Kind bonds
  • Applicable High Yield Discount Obligation (AHYDO) Rules
• Modeling convertible debt
• Modeling interest rate and currency swaps

6. Bankruptcies

• Modeling fresh start accounting and new capital structure after a bankruptcy
• Modeling cancellation of debt income
• Modeling tax attributes after a bankruptcy
  • NOLs
  • Reduction in tax basis

7. Step acquisitions and non-controlling interest

• Equity method investments
• Gaining control
• Non-controlling interests
• Transactions with non-controlling interests

8. Modeling corporate breakups

• Split-offs
• Split-ups
• Spin-offs
• Equity carve-outs
• Leveraged spin-offs
• Cash-rich split-offs

9. Modeling project finance

• Modeling project finance and non-recourse loans
• Modeling YieldCos

10. Modeling tax-efficient structures

• Sale leasebacks
• Inverted lease
• Partnership flip

11. Modeling securitizations

• Why companies securitize
• Variable interest entity rules

12. Final exam

For Langone classes (evening), the final exam is in the last class. For day classes, the final exam is as per the time set by the registrar. Please check the registrar's website.