Part 1 — M&A Overview
1
The Global M&A Market
Deal Volume — Know the Trajectory
| Era | Annual Volume (avg) | Key Driver |
|---|---|---|
| The 80s | ~$250bn | Junk bond era; LBO wave |
| The 90s | ~$1.2tn | Internet boom; strategic M&A |
| The 00s | ~$2.2tn | Cheap debt; PE expansion |
| The teens | ~$3.0tn | Record low interest rates |
| 2021 (record) | $5.8tn | Pandemic liquidity; SPAC boom |
| 2022–23 | Declined to ~$3tn | Rate hikes; credit tightening |
| 2025 | ~$4.8tn | Rate expectations; $10tn corporate cash |
Cross-border deals: consistently >40% of all M&A
Asia Pacific: >20% of global M&A since 2009 (up from 12% in 2000)
PE deals: ~24% of worldwide M&A (up from 3% in 2000)
Types of M&A — The Taxonomy
| Type | Definition | Key Distinction |
|---|---|---|
| Strategic | Buyer does not intend to subsequently sell | Motivated by synergies, growth, positioning, EPS accretion |
| Financial | Buyer intends to subsequently sell (PE/LBO) | Financial return dominates; leverage is the mechanism |
| Acquisition | Target absorbed by acquiror; acquiror retains identity | Acquiror gets all assets and liabilities of target |
| Merger / Amalgamation | Two firms combine into a new legal entity | Both shareholder sets must approve; new company created |
| Cross-border | Buyer and target in different countries | FX, regulatory, cultural, GAAP complexity added |
Control Premium: Buyers typically pay 20–30% above the target's market price to incentivize shareholders to vote in favour of the deal.
Strategic M&A Rationale
| Rationale | Examples |
|---|---|
| Enhance Growth | Horizontal integration, geographic expansion (SABMiller/Foster's), brand/IP acquisition |
| Margin Improvement | Economies of scale, vertical integration (supply chain), buy/sell stronger margin businesses |
| Strategic Positioning | Diversification, resource procurement, market share / defensive positioning |
| Market/Shareholder | Shareholder optimization via restructuring, cash optimization |
| Other (Ego) | Management empire-building — leads to overpaying |
2
Sell-Side Process Strategies
| Strategy | Buyers Contacted | Timing | Pros | Cons | Optimal When |
|---|---|---|---|---|---|
| Broad Auction | Up to 50 globally | 4–6 months | Maximizes competitive tension; strong board comfort | Confidentiality risk; "damaged goods" if it fails | Strong sector; well-known brand; consolidating industry |
| Targeted Auction | 5–10 | ~3 months | Competitive but manageable; limits disruption | Harder to sustain competitive tension | Weaker sector outlook; fewer relevant precedents |
| Negotiated Process | 1–3 | ~2 months | Confidential; fastest; can achieve pre-emptive premium | Weakest leverage; reduced board comfort | Complex transactions; perception of credible alternatives |
Typical M&A Timetable (Targeted Auction)
| Weeks 0–4 | Weeks 4–8 | Weeks 8–12 | Weeks 12–16 |
|---|---|---|---|
| Preparation Due diligence; prepare teaser; agree buyer list; prepare info materials; draft confidentiality letter |
Marketing Contact buyers; sign NDAs; distribute CIM; receive first-round bids; evaluate bids |
Short-list / DD Select finalists; management presentations; site visits; draft Sale Agreement; receive final bids |
Negotiate & Close Negotiate with selected buyer(s); exclusivity/no-shop; execute Sales Agreement; close |
Role of Advisors
Sell-Side Advisor
- Valuation & strategic advice
- Identify and prioritize objectives (timing, structure, tax, confidentiality)
- Design and run the sales process
- Identify appropriate buyers
- Negotiate & close on client's behalf
Buy-Side Advisor
- Identify and prioritize buyer objectives
- Identify appropriate targets
- Design approach strategy (direct vs. indirect)
- Due diligence on target
- Structure, negotiate, and close
- "Ability to Pay" analysis (EPS accretion/dilution)
Part 2 — Legal Framework
3
Critical Shareholder Thresholds
Ontario Securities Act — Illustrative (Globally Consistent Concepts)
| Threshold | Trigger | Implication |
|---|---|---|
| 10% | "Early Warning" | Must publicly disclose ownership |
| 20% | "Takeover Bid" | Cannot purchase additional shares without launching a formal takeover bid |
| 50.1% | "Control" | Can effectively remove the Board without cause |
| 66.7% | "Amalgamation" | Merger requires 66.7% approval + majority of minority shareholders |
| 90% | "Minority Squeeze Out" | Can force remaining 10% minority to sell at the takeover price |
4
Friendly vs. Hostile Transactions
Friendly Transactions
- Target willingly participates
- Provides confidential information
- Participates in due diligence
- May agree to exclusivity / no-shop
- Negotiates documentation
- Occurs when target puts itself up for sale OR unsolicited approach is welcomed
Hostile Transactions
- Target does not cooperate
- No access to confidential info
- Target proactively defends itself
- Acquiror tactics: Quietly accumulate 10%; buy additional 10% below intended price; launch formal Takeover Bid at 20%
Canada data (1994–2011): Only ~7% of initial hostile bids succeed. Most result in a higher price — either the bidder raises the bid (~37%) or a White Knight succeeds (~33%).
Hostile Target Defences ("Shark Repellents")
| Defence | Mechanism | Example |
|---|---|---|
| Poison Pill (Shareholder Rights Plan) | "Flip-in" rights: existing shareholders buy more shares at a discount, diluting acquiror's stake. "Flip-over" rights: target shareholders can buy acquiror shares at a discount post-takeover | Twitter vs. Elon Musk (April 2022) |
| White Knight | Invite a preferred acquiror to make a competing bid | TMX Group sought alternative to LSE |
| Large Dividend | Distribute cash to reduce attractiveness; reduces offer value in "less any declared dividends" bids | Foster's paid A$0.1325 dividend vs. SABMiller |
| Classified / Staggered Board | Directors elected in stages — prevents hostile bidder gaining full board control quickly (~50% of S&P Super 1500) | Common in US companies |
| Sell Crown Jewels / Buy Unwanted Assets | Make the company less attractive to the acquiror | — |
| Issue Stock Options | Could trigger mass exit of key employees post-vesting, destroying value | — |
5
Key Merger Agreement Provisions
| Provision | What It Does | Real Example |
|---|---|---|
| MAC / MAE Clause | Material Adverse Change — gives buyer the right to walk if target's business deteriorates materially before close | LVMH tried to invoke against Tiffany during COVID; settled at $131.50 vs. original $135 |
| Break-Up Fee | Target pays acquiror if it accepts a competing bid | Standard in most public M&A |
| No-Shop | Target cannot solicit competing offers for a defined period | Negotiated process often enters no-shop early |
| Reps & Warranties | Target certifies accuracy of disclosed information; "bring down" at closing | Indemnification applies if reps are false |
| Financing Commitment | Acquiror must demonstrate ability to fund the deal | Critical for cash deals — "highly confident" letter from banks |
6
Acquisition Currency: Cash vs. Stock
Cash (Debt-Financed)
- Target shareholders receive certain value immediately
- Triggers a taxable capital gains event (Canada: 25–30% premium required)
- Debt is typically cheaper than equity → more accretive to EPS
- Increases acquiror's leverage
- Debt P/E test applies for accretion check
Debt P/E (Cash Accretion Test)
Debt P/E = 1 / [k_d × (1 − t)]
If Debt P/E > Target P/E → Cash deal is ACCRETIVE
If Debt P/E > Target P/E → Cash deal is ACCRETIVE
Stock
- Target shareholders receive acquiror shares
- No immediate taxable event → lower premium required (Canada: 15–20%)
- Acquiror shareholders are diluted
- Fixed exchange ratio: target gets fixed # of acquiror shares regardless of price
- Floating exchange ratio: target gets fixed $ value; # of shares varies
- Collars/Caps limit upside/downside for both parties
Stock Accretion Test
If Acquiror P/E > Target P/E (at offer price)
→ Stock deal is ACCRETIVE
→ Stock deal is ACCRETIVE
M&A: Who Wins? (The Evidence)
| Party | Outcome | Magnitude |
|---|---|---|
| Target shareholders — cash deal | WIN | 25–30% premium (Canada; higher due to taxable event) |
| Target shareholders — stock deal | WIN | 15–20% premium |
| Acquiror shareholders | OFTEN LOSE | ~2/3 lose value in year after deal; losses typically single digits |
| Acquiror (stock-financed) | WORSE | Stock deals are worse for acquiror than cash deals |
Why acquirors underperform: Overpaying (RBS/ABN Amro); synergies not realized; integration failure; cultural clashes (IBM/Lotus); management distraction; ego-driven rationale
Part 3 — Quantitative M&A Analyses
7
EPS Accretion / Dilution Analysis
The Framework
An incremental EPS accretion/dilution analysis builds up pro forma combined net income, then computes pro forma EPS and compares it to the acquiror's standalone pre-deal EPS.
Pro Forma Net Income
= Acquiror NI
+ Target NI
− After-tax interest expense (if cash/debt financed)
+ After-tax cost synergies
+ After-tax revenue synergies
− After-tax transaction costs
Pro Forma EPS = Pro Forma NI / Pro Forma Shares Outstanding
If Pro Forma EPS > Standalone EPS → ACCRETIVE
If Pro Forma EPS < Standalone EPS → DILUTIVE
+ Target NI
− After-tax interest expense (if cash/debt financed)
+ After-tax cost synergies
+ After-tax revenue synergies
− After-tax transaction costs
Pro Forma EPS = Pro Forma NI / Pro Forma Shares Outstanding
If Pro Forma EPS > Standalone EPS → ACCRETIVE
If Pro Forma EPS < Standalone EPS → DILUTIVE
Break-even synergies: If dilutive, calculate the pre-tax synergies required to make Pro Forma EPS = Standalone EPS. This is a key output bankers present to boards.
Widget A/B Worked Example (from slides)
| Input | Widget A (Acquiror) | Widget B (Target) |
|---|---|---|
| EPS | $5.00 | $1.50 |
| Shares Outstanding | 1,000,000 | 500,000 |
| Stock Price | $50.00 | $15.00 |
| Offer Price | — | $20.00 |
| P/E Multiple | 10.0x | 13.3x (at offer price) |
| Cost of Debt | 5% | — |
| Tax Rate | 35% | — |
Widget A Debt P/E
= 1 / (5% × (1 − 35%)) = 1 / 3.25% = 30.8x
Since Target P/E (13.3x) < Debt P/E (30.8x) → Cash deal is ACCRETIVE
Since Target P/E (13.3x) > Acquiror P/E (10.0x) → Stock deal is DILUTIVE
Since Target P/E (13.3x) < Debt P/E (30.8x) → Cash deal is ACCRETIVE
Since Target P/E (13.3x) > Acquiror P/E (10.0x) → Stock deal is DILUTIVE
100% Stock DILUTIVE
| Acquiror NI | $5,000,000 |
| Target NI | $750,000 |
| Pro Forma NI | $5,750,000 |
| New shares issued ($10M / $50) | 200,000 |
| Pro Forma Shares | 1,200,000 |
| Pro Forma EPS | $4.79 |
| Standalone EPS | $5.00 |
| Pre-tax synergies to break even | $384,615 |
100% Cash (new debt) ACCRETIVE
| Acquiror NI | $5,000,000 |
| Target NI | $750,000 |
| Pre-tax interest ($10M × 5%) | ($500,000) |
| Tax shield (35%) | $175,000 |
| Pro Forma NI | $5,425,000 |
| Shares Outstanding | 1,000,000 (unchanged) |
| Pro Forma EPS | $5.43 |
| Standalone EPS | $5.00 |
| % Accretion | +8.5% |
Other Standard M&A Analyses
| Analysis | What It Shows | Used For |
|---|---|---|
| Analysis at Various Prices (AVP) | Target's implied valuation multiples (EV/EBITDA, P/E) at different offer premiums | Negotiation framing; board presentation |
| Contribution Analysis | Each company's % contribution to combined Revenue/EBITDA/EBIT/NI — without synergies | Fairness; equity ownership benchmarking |
| "Has/Gets" Analysis | What each shareholder group owns pre-deal ("has") vs. their share of the combined entity post-deal ("gets") | Shareholder fairness; negotiating ownership splits |
| Credit Impact | Pro forma Debt/EBITDA and EBITDA/Interest under each structure | Assess whether acquiror's credit is impaired by the deal |
| Synergy Sensitivity | EPS accretion/dilution at various prices AND synergy levels simultaneously | Stress-test the deal at different negotiating outcomes |
Part 4 — Leveraged Buyouts (LBOs)
8
LBO Fundamentals
What Is an LBO?
An LBO is the acquisition of a target ("Newco") funded primarily with debt, where the debt is repaid using only the target's own cash flows and assets — not the acquiror's. PE firms drive the market, targeting 15–25% annualized IRR.
Illustrative — assumes no fees or tax consequences. EBITDA $100mm.
Value creation levers:
- Company growth
- Margin improvement
- High-velocity debt repayment (leverage effect)
- Multiple expansion between entry and exit
- Dividend recapitalization
LBO Return Metrics
IRR (Internal Rate of Return)
IRR = (Exit Proceeds / Initial Investment)^(1/n) − 1
Example: $400mm invested → $1,600mm returned in 5 years
IRR = ($1,600 / $400)^(1/5) − 1 = 32%
Example: $400mm invested → $1,600mm returned in 5 years
IRR = ($1,600 / $400)^(1/5) − 1 = 32%
Multiple of Invested Capital (MOIC)
MOIC = Total Value Returned / Capital Invested
= (Distributed Value + Residual Value)
/ (Capital Invested + Fees)
Example above: $1,600 / $400 = 4x
= (Distributed Value + Residual Value)
/ (Capital Invested + Fees)
Example above: $1,600 / $400 = 4x
Note: Neither IRR nor MOIC is relative to the market or controls for leverage/beta. More sophisticated market-relative measures exist but have not yet been widely adopted.
LBO Financing Thought Sequence
- 1What debt/capital ratio does the market require? How much equity "skin in the game" does the market require from the PE investor? (Currently ~45–50% equity contribution)
- 2What is the implied leverage multiple? Debt/EBITDA implied by Step 1 and the purchase price. (Currently ~5x Debt/EBITDA)
- 3What is the implied coverage multiple? EBITDA/Interest — is this serviceable? At 12% interest on $600mm debt and $100mm EBITDA, coverage = 1.4x — dangerously thin
Current LBO Market Dynamics (2024–2025)
| Metric | Current Level | Context |
|---|---|---|
| Purchase price multiples | ~11x EV/EBITDA | Up from ~9x in 2012; high given stock market levels |
| Equity contribution | ~45–50% | Up sharply from ~35% in low-rate era; PE has more skin in the game |
| Average debt multiple | ~5x Debt/EBITDA | Recovering from 2023 lows; first-lien dominates |
| Average interest coverage | ~2.4x | Compressed from 3.5x at 2020 lows |
| Financing source | Private credit dominant | Displacing syndicated bank loans as primary LBO credit source |
| Exit environment | Delayed exits | High rates trapped portfolio companies → surge in dividend recaps |
Optimal LBO Candidate Characteristics
An exam question may ask you to evaluate a company as an LBO target. Assess these criteria:
Must-Haves (Debt Serviceability)
- Strong, predictable, high-margin cash flows
- Low cyclicality / recession-resistant
- Low capex requirements (cash available for debt service)
- Low existing debt (capacity for new leverage)
- Tangible assets as collateral
Strong-to-Haves (Return Enhancement)
- Strong, defensible market position (barriers to entry)
- Multiple expansion potential at exit (consolidation; IPO)
- Margin improvement opportunity
- Divestible non-core assets (capital raising)
- Temporarily depressed price for non-fundamental reasons
- LBO-friendly controlling shareholder
Kwik-Fit LBO Capital Structure Example (Europe, 2005)
EV: £773.5mm; EBITDA: £96mm; Purchase multiple: 8.1x EV/EBITDA
| Tranche | % of Capital Structure | Debt/EBITDA Multiple | Cost | Risk |
|---|---|---|---|---|
| Senior Bank Debt (Term A/B/C) | 53% | 4.3x | LIBOR +2.25–3.00% | Low (first claim on assets) |
| Junior / Second-Lien Debt | 10% | 1.8x | LIBOR +5.00% | Medium |
| Mezzanine | 12% | — | LIBOR +4.5% + 5% PIK | Medium-High |
| Equity | 25% | 2.0x | Residual | High (last claim) |
PIK = Payment In Kind (interest accrues rather than paid in cash). Mezzanine layers risk between junior debt and equity.
Part 5 — Melco Case Prep
9
Melco Entertainment — Case Overview
The Decision
Melco's board must decide: accept MGM Mirage's informal $8B equity offer, or proceed with the planned IPO. GM Capital (Grimba) must value Melco and advise on the strategic options.
| Key Fact | Detail |
|---|---|
| Melco 2007A Revenue | $773.0mm |
| Melco 2007A EBITDA | EBIT $304.7 + D&A $79.2 = $383.9mm |
| Melco 2007A Net Income | $145.4mm |
| Long-term debt (2007) | $1,275.77mm |
| Cash (2007) | $79.0mm |
| Net debt | $1,196.8mm |
| Revenue growth (2008–2010) | 50% per year |
| Revenue growth (2011–2014) | 10% per year |
| Terminal growth rate (post-2014) | 3–4% |
| Tax rate | 32% constant |
| NWC assumption | 4% of sales (ΔNWC = cash use as revenue grows) |
| Risk-free rate (10yr Treasury) | 4.12% |
| Market risk premium | 5.5% |
| BBB credit spread over Treasury | 3.0% |
| Cost of debt (BBB) | 4.12% + 3.0% = 7.12% |
| Target D/E ratio | 0.5 (D/V = 33.3%, E/V = 66.7%) |
| MGM WACC advantage | Reduces standalone WACC by 0.5% |
| Synergies | 2% × 2007 revenue = $15.46mm/yr (75% probability; phased 25/50/100% over 3 years) |
| M&A advisory fee | 2% of total equity transaction value |
| IPO underpricing discount | 15% |
| IPO banking fee | 7% of post-discount equity value of stake sold |
| Guggenheim stake being sold (IPO) | 9% of Melco (half of 18%) |
Comparable Company Data (Exhibit 1)
| Company | Market Cap | Net Debt | EV | Beta (levered) | EBITDA 2007A | EBITDA 2008E | EV/EBITDA 2007A | EV/EBITDA 2008E |
|---|---|---|---|---|---|---|---|---|
| MGM Mirage | $27,750 | $13,820 | $41,569 | 0.99 | $4,513 | $4,968 | 9.2x | 8.4x |
| Harrah's | $16,376 | $11,638 | $28,014 | 0.85 | $3,298 | $3,536 | 8.5x | 7.9x |
| Las Vegas Sands | $42,178 | $5,611 | $47,789 | 1.18 | $3,146 | $4,228 | 15.2x | 11.3x |
| Eastern Star | $4,735 | $53 | $4,788 | 1.33 | $190 | $297 | 25.3x | 16.1x |
| Wynn Resorts | $15,376 | ($1,277) | $14,099 | 1.14 | $879 | $1,189 | 16.0x | 11.9x |
All figures in $mm. Net debt = Debt − Cash. Note Wynn has net cash (negative net debt).
Beta Estimation Approach (Private Company — No Observed Beta)
Step 1: Unlever each comparable beta
β_unlevered = β_levered / [1 + (D/E) × (1 − t)]
Step 2: Average unlevered betas Take median or mean of comparable β_unlevered values
Step 3: Re-lever at Melco's target D/E = 0.5 β_relevered = β_unlevered × [1 + (0.5) × (1 − 0.32)]
Step 4: Apply CAPM k_e = r_f + β_relevered × MRP
k_e = 4.12% + β_relevered × 5.5%
Step 2: Average unlevered betas Take median or mean of comparable β_unlevered values
Step 3: Re-lever at Melco's target D/E = 0.5 β_relevered = β_unlevered × [1 + (0.5) × (1 − 0.32)]
Step 4: Apply CAPM k_e = r_f + β_relevered × MRP
k_e = 4.12% + β_relevered × 5.5%
Note: Melco is a Macau pure play. Eastern Star and Las Vegas Sands are most comparable (significant Macau exposure). Weight these more heavily or use them selectively when computing the average unlevered beta.
DCF — Capex and D&A Schedule (Exhibit 2)
| 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | |
|---|---|---|---|---|---|---|---|
| Capital Expenditures ($mm) | 989.8 | 494.9 | 247.4 | 185.6 | 185.6 | 185.6 | 185.6 |
| D&A ($mm) | 118.8 | 151.8 | 168.3 | 180.6 | 193.0 | 205.4 | 185.6 |
2008–2010 capex is heavy due to City of Dreams construction. Post-2010 capex normalises. Note large capex relative to D&A in early years — significant FCF drag.
FCFF Formula
FCFF = EBIT × (1 − t) + D&A − Capex − ΔNWC
where ΔNWC = NWC(t) − NWC(t−1)
NWC = 4% × Revenue
where ΔNWC = NWC(t) − NWC(t−1)
NWC = 4% × Revenue
Strategic Questions for Class Discussion
- Q1Is the $8B MGM offer adequate? Compare to your DCF equity value (EV − net debt) and comps-implied equity value. MGM has not disclosed financing — cash or stock? Key for tax/premium implications.
- Q2What process should Melco run? Given MGM is at the table and another party is reportedly interested, a targeted auction is appropriate. A broad auction risks confidentiality (Macau licensing is sensitive).
- Q3Can MGM afford it? MGM already carries ~$14B debt and the $7.4B CityCenter is under construction. Ability-to-pay analysis is critical. An all-stock deal shifts deal risk to Melco shareholders.
- Q4IPO as bargaining chip. Grimba should think about how to use the announced IPO to create competitive tension and credibility. However, IPO underpricing (15%) represents real value destruction — only pursue if M&A value is insufficient.
- Q5What is Melco worth to MGM specifically? Value = Standalone DCF + risk-adjusted synergies, discounted at MGM's lower WACC (−0.5% vs. standalone). This is the acquiror's maximum willingness to pay.
Part 6 — Exam Alerts & Key Formulas
10
Likely Tested Concepts
Control Premium
20–30% above market price. Cash deals require higher premium (25–30%) in Canada as target shareholders trigger a taxable capital gains event.
Shareholder Thresholds
10% = disclose; 20% = formal bid required; 50.1% = control; 66.7% = amalgamation; 90% = squeeze out minority
EPS Accretion/Dilution
Be able to compute for both cash (debt-financed) and stock structures. Know Debt P/E test and stock P/E comparison rule.
Debt P/E Formula
= 1 / [k_d × (1 − t)]. If Debt P/E > Target P/E at offer price, cash deal is accretive. Debt is typically cheaper than equity → cash deals are more accretive.
LBO IRR Formula
IRR = (Exit / Initial Investment)^(1/n) − 1. Common exam: given entry multiple, exit multiple, and n years, compute IRR.
MOIC
= Total Value Returned / Capital Invested. IRR and MOIC are both used; neither is market-relative nor controls for leverage.
Ideal LBO Candidate
Strong steady cash flows; low cyclicality; low existing debt; low capex; tangible assets; strong market position; multiple expansion potential at exit.
Poison Pill Mechanics
Flip-in: existing shareholders buy target shares at discount, diluting acquiror. Flip-over: post-takeover, target holders buy acquiror shares at discount. Twitter/Musk 2022 is the live example.
MAC Clause
Material Adverse Change — gives buyer exit right if target deteriorates materially before close. LVMH/Tiffany 2020 is the live example.
IPO Mechanics
15% standard underpricing (compensation for uncertainty). 7% banking fee on the post-discount value of the stake sold. Follow-on offerings don't require 15% discount.
M&A Outcome Evidence
Target shareholders always win (15–30% premium). Acquiror shareholders: ~2/3 lose value in year 1. Cash-financed deals are better for acquiror than stock deals.
Sell-Side Process Strategies
Know Broad Auction vs. Targeted Auction vs. Negotiated Process — timing, number of buyers, optimal conditions, and key tradeoffs for each.
Complete Formula Reference
EPS Accretion / Dilution
Pro Forma NI = Acquiror NI + Target NI − After-tax interest (cash) ± synergies
Pro Forma EPS = Pro Forma NI / Pro Forma Shares Outstanding
Accretive if Pro Forma EPS > Standalone EPS
Cash Deal Accretion Test (Debt P/E) Debt P/E = 1 / [k_d × (1 − t)]
Accretive if Debt P/E > Target P/E (at offer price)
Stock Deal Accretion Test Accretive if Acquiror P/E > Target P/E (at offer price)
LBO IRR IRR = (Exit Proceeds / Initial Equity Investment)^(1/n) − 1
LBO Multiple of Invested Capital (MOIC) MOIC = Total Value Returned / Capital Invested
Beta Unlevering / Relevering β_unlevered = β_levered / [1 + (D/E) × (1 − t)]
β_relevered = β_unlevered × [1 + (D/E) × (1 − t)]
WACC WACC = (E/V) × k_e + (D/V) × k_d × (1 − t)
Cost of Equity (CAPM) k_e = r_f + β × MRP
FCFF (Free Cash Flow to the Firm) FCFF = EBIT × (1 − t) + D&A − Capex − ΔNWC
Enterprise Value EV = Market Cap + Debt − Cash
Equity Value = EV − Net Debt
Terminal Value (Gordon Growth) TV = FCFF_(n+1) / (WACC − g)
Pro Forma EPS = Pro Forma NI / Pro Forma Shares Outstanding
Accretive if Pro Forma EPS > Standalone EPS
Cash Deal Accretion Test (Debt P/E) Debt P/E = 1 / [k_d × (1 − t)]
Accretive if Debt P/E > Target P/E (at offer price)
Stock Deal Accretion Test Accretive if Acquiror P/E > Target P/E (at offer price)
LBO IRR IRR = (Exit Proceeds / Initial Equity Investment)^(1/n) − 1
LBO Multiple of Invested Capital (MOIC) MOIC = Total Value Returned / Capital Invested
Beta Unlevering / Relevering β_unlevered = β_levered / [1 + (D/E) × (1 − t)]
β_relevered = β_unlevered × [1 + (D/E) × (1 − t)]
WACC WACC = (E/V) × k_e + (D/V) × k_d × (1 − t)
Cost of Equity (CAPM) k_e = r_f + β × MRP
FCFF (Free Cash Flow to the Firm) FCFF = EBIT × (1 − t) + D&A − Capex − ΔNWC
Enterprise Value EV = Market Cap + Debt − Cash
Equity Value = EV − Net Debt
Terminal Value (Gordon Growth) TV = FCFF_(n+1) / (WACC − g)
MBUS 813 — Session 5 Prep · Queen's Smith AMBA 2026 · Generated May 2026