UBS has two sides

  • Global Banking (GB) private information from clients, etc…
  • global markets quant, trading, etc… (public information)

US is biggest market, biggest M&A fees

M&A

There are 2 reasons:

  • revenue reasons
    • accelerate growth, enter new markets, diversify
    • better products (see Pharma Acquisition)
  • cost reasons (cost synergies, avoid new competitors, increase purchasing power)
    • economies of scale
    • vertical integration

There are two main legal classifications:

Merger

“Legal” transaction
Two companies combine all assets and liabilities.
one will survive other is incorporated in.

Merger is more difficult regarding tax (than acquisition)

  • international exit tax

Acquisition

two ways:

  • stock purchase (easy legal transaction)
  • asset purchase (acquires explicit assets)
    • only assumes liabilities of the target that have been specifically determined
    • lots of legal precision required

Note under public M&A rules, either a merger or public offer is more advantageous (approval threshold, interloper risk when doing an acquisition)

Other Classifications

  • nature of target (public, private, public subsidiary)
  • geography (international, national)
  • strategy (bolt on, transformational)
  • type of consideration (cash, stock, mix)
  • process type (bilateral discussion, limited auction, broad auction)
  • pro-forma ownership (merger of equals, outright acquisition)

M&A sell side process

very careful of how to approach this:

  • if you’re selling, why? is something wrong?
    careful framing planning

Due Diligence Report large document from external vendor, commissioned by external vendor

recently: change of more casual approach more preparation, informal approaches

Foreign Players in US not easy. You almost have to have a local bank, otherwise investor pool will ask questions

  • US banks are cohesive in not helping out foreign banks
  • US banks don’t compete on fees almost “monopoly”

Case Study

adjacent spaces, not same area but same clients, etc…
two shareholders (private, public)

Note:

  • B’s subsidiary is very valuable (majority of value of B)
  • B’s subsidiary also much larger than A’s presence in the country

Qs:

  • integration, competition issues, legal ramifications
  • who should be the buyer (A, subsidiary, other)?
    • they decided listed company A should buy
  • who should be target (B, subsidiary)
    • company B now

Enterprise Value (EV) vs. Equity Value (EqV)

Interesting: We always use public valuation for Equity Value (not face value of equity) when valuing assets

  • but for debts, we don’t use public value but face value!
  • weird, because this massively impacts

EqV = share price * diluted shares outstanding (value belonging to equity holders only, i.e. shareholders)

Right side: EV = value of the firm to all stakeholders (debt holders + equity holders)

To calculate EV = EqV + Debt - Cash + Other EV adjustments (so positive for Debts, negative for assets)

  • equity investments in associates decreasees the Other EV adjustments

Discounted Cash Flow (DCF) Analysis

There’s a lot of “art” when doing the fundamental assumptions, that influence the hard math models.

UBS always does a DCF

  • not for pure dollar values
  • play out different scenarios (ukraine spillover into eastern european countries for acquisition with assets in that region for ex)
    Looking at the volatility of the value rather than number

They look at EV / EBITDA kind of cashflow.
but this is different for each industry

Negotiation Considerations

bankers try to find the deal that works for both parties very easy to walk away from a deal

Potential Stakeholders

  • shareholders, board of directors, management, employees
  • external:
    • clients:
      • research analysts
      • capital markets
      • unions
    • buyer/seller
      • rating agencies
      • regulators
      • general public
    • and for both: press, proxy advisors

Negotiations are different amongst stakeholders:

  • chairman to chairman
    • focus on few items define the transactions
    • face to face in person
  • mgmt. to mgmt
    • more detailed negotiation
    • control and oversight function
  • advisor to advisor
    • negotiate and implement the high-level terms agreed upon by chairmen and management
    • support them in tactics and likely outcomes
    • they have experience

They all have a potential hidden agenda

difference in culture

  • roche, etc… have entire teams
  • some countries different process

Extra

Short

Legal Classifications:

  • merger: combines all assets and liabilities into one surviving entity
  • stock purchase: buyer acquires stock to control all assets and liabilities
  • asset purchase: buyer acquires explicitly determined assets and specific liabilities

Matching Multiple to Description

  • “Independent of leverage and capital structure; well-understood; good in cyclical industries; BUT distorted by differences in capex levels.” → EV/EBITDA

    • capital-structure-neutral, good for cyclicals, but ignores capex differences (hence EV/(EBITDA-capex) for capital-intensive sectors)
  • “Cash-based and forward-looking; comparable across capital structures and business models; but sensitive to forecasts and can misrepresent cyclicality.” → Equity FCF yield

    • true cash returns but sensitive to forecasts
  • “Widely used (especially +1); consensus prospective EPS readily available; BUT distorted by accounting practices, depreciation, leverage, and is highly sensitive in cyclical companies.” → P/E

    • bottom-line, distorted by depreciation/leverage/taxes
  • “Used primarily for financial institutions; reflects long-term profitability outlook; BUT distorted by accounting differences and requires a profitability cross-check.” → P/B

    • primarily for financial institutions
  • “Used primarily for high-growth/tech companies prior to EBITDA-positive stage; highly dependent on profitability and requires similar path to profitability.” → EV/Sales

    • for pre-EBITDA growth companies.

Multiples in Short

Cyclicality

EV/EBITDA is better than P/E in cyclical industries, because EV/EBITDA is unaffected by extra leverage taken on during downturns EV & EBITDA are before taxes

P/E Earnings collapse at low-turns and surge at the peak, making cycle to cycle and firm/firm comparisons useless.

Familiarity

P/E is widely used and widely compared familiar to investors
however, it’s also very distorted.

Leverage

  • EV/EBITDA is calculated before interest payments, so it sits above the debt line — the multiple is the same regardless of how a firm is financed.
  • P/E is computed on net income, which is after interest
    • meaning a more leveraged firm reports lower earnings and thus a higher P/E even if the underlying business is identical.

This makes P/E unreliable when comparing firms with different capital structures.

CapEx Levels

EV/EBITDA is influenced by CapEx levels higher CapEx shrinks EBITDA.
For that we use EV/Cashflow or EV/(EBITDA - capex).

EBITDA ignores capex entirely, so two firms with very different investment needs (e.g. one leasing equipment, one owning it) will look artificially comparable.

Two firms, identical EBITDA of €100m. Firm A spends €10m/year on capex, Firm B spends €60m/year. EV/EBITDA treats them identically. EV/(EBITDA − capex) gives Firm B a much higher multiple for the same EV, correctly reflecting that its “real” cash generation is far lower.

  • buy new machine for $ 100m cash
    • Cash (asset) - 100m
    • PP&E (asset) + 100m
      Net effect on income is 0 capex invisible to EBITDA
  • Depreciation
    • over time, we add the value of the asset
    • Depreciation +10m (income statement reduces EBIT)
    • Accumulated Depreciation +10m (balance sheet reduces PP&E book value)
      the CapEx spends gets released gradually …
      But with EBITDA, we remove depreciation makes the asset invisible.