FIN 674 Spring 2024 Project 2: Proposing a Deal for a Publicly Traded Acquirer. 

Proposal of a new buy-out: Assume now that you are an analyst for an M&A group that advises corporations that are active in the M&A market. The easiest and most efficient assumption is that you work for the acquirer whose deal you worked on in Project 1. Your boss has asked you to propose the next target for the firm you work for. If you are using the same acquirer as in Project 1 you should structure your proposal GIVEN WHAT YOU KNOW ABOUT THE SUCCESS OR FAILURE OF YOUR PROJECT ONE DEAL.

Crucial Details: Due Date Monday, May 6th by 5:00 p.m. in printed form. Please turn it in to the Finance Office, 512 Jenkins. You get 10 points of extra credit if you turn it in by 5:00 p.m. on Friday, May 3rd. You should start on it BEFORE the exam on WEDNESDAY, May 1st so you understand the Gordon Growth and H-Model Terminal Value calculations very well. Also, I am happy to answer questions or review any of your work as you go along if you e-mail it to me. It will take me 24 hours to get to it though.

MAXIMUM Length: 5 pages including graphs and charts. Write in summary form, using bullet points wherever possible. This is not a term paper. Writing, organization, flow, and appearance count for 20 points.

Points to cover in your report (use labeled sub-heads so someone who does not have this understands your analysis and recommendations):

1. Analyze the risk section of the acquiring company’s 10-K report and list three or four characteristics the acquirer should look for in a target firm to help minimize the important exposures of the combined firm. If you have the same acquirer as in Project 1 also use your knowledge of the results of the merger in Project One. (5 points)
2. Choose your target: (you might go back to the subset of firms from Project 1 that you used as trading comps that had attractive growth and operating margins if you are keeping the same acquirer) THE TARGET MUST BE PUBLICLY TRADED. Clearly explain the reason or reasons for your selection. (10 points)
3. Briefly describe your target firm including main lines of business and recent positive or negative news. (10 points)
4. Get the acquirer’s and the target’s WACC and Key Statistics and Cash Flow Statements from Bloomberg. You need the target’s Balance Sheet as well and might need the acquirer’s Income Statements, if it depends on whether the firms show Cash Taxes at the bottom of the Cash Flow Statement for all of the years you need. Use the information in the target to fill out the historical percentages in the DCF and decide on assumptions for Revenue Growth, EBITDA Margin, the Cash Tax Rate, Depreciation+Amortization /Revenue, Net CapEx/Revenue and Net Non-Cash Working Capital/Revenue for the target as a stand-alone enterprise. Explain your logic behind EACH of these assumptions. (10 points)
5. If your target is one of the final trading comps from your first project and you have the appropriate growth rate set you can use your multiple from that project for Terminal Value. If not decide on the long-term normal growth rate you are going to assume for your target firm and whether you are going to use Gordon or H for Terminal Value. Explain each of your Terminal Value assumptions. Be conservative, you work for the acquirer. (5 points)
6. Use these assumptions to fill in an initial DCF for the target. Use the target’s WACC for the discount rate. Use the target’s balance sheet to fill in the lower portion of the DCF to derive an intrinsic value per share of the target. Include any assets and stronger claims you think are relevant. Compare this value to the current price of the target. (10 points)
7. Compare the Revenue Growth Rates and Operating Margins of the target to those of the acquirer. Adjust the DCF if there are areas where the acquirer is superior to this target. Also, now use the acquirer’s WACC as the discount rate. Explain your adjustments and compare this value to the current price of the target. For more extra credit, create a sensitivity table and/or a best and worst case scenario analysis or some sensitivity analysis using Goal Seek to enhance your prospective valuations of the new target firm. (10 points)
8. Find the 52-Week High of the target. Use this and your answers to (6) and (7) to set a range for the intrinsic value per share of your proposed acquisition. (10 points)
9. Create an Executive Summary page that you use as YOUR COVER PAGE that summarizes your analysis and conclusions. Show the results of your risk and DCF analysis on the cover! Give your reasons for selecting the target and explain whether you think the stand alone and internal DCF values of the new target are believable. Your cover page should show a graph of the target’s price over at least the last three years. You need to download the target’s stock prices to do the graph and label the axes in a large enough font to be legible. The graph should also show your range of intrinsic values for the new target. (10 points)