University of Mississippi eGrove American Institute of Certified Public Guides, Handbooks and Manuals Accountants (AICPA) Historical Collection 1999 CPA's basic guide to mergers & acquisitions Ronald G. Quintero Follow this and additional works at: https://egrove.olemiss.edu/aicpa_guides Part of the Accounting Commons, and the Taxation Commons THE CPA'S BASIC GUIDE TO ergers cquisitions AICPA Ronald G. Quintero, CPA, CMA, CFA THE CPA'S BASIC GUIDE TO ergers cquisitions CPA R o n a ldC. Q u in te ro , CPA, CMA, CFA Notice to Readers The CPA’s Basic Guide to Mergers & Acquisitions does not represent an official position of the American Institute of Certified Public Accountants, and it is distributed with the understanding that the author and publisher are not rendering legal, accounting, or other professional services in this publicaion. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Copyright © 1999 by American Institute of Certified Public Accountants, Inc., New York, NY 10036-8775 All rights reserved. For information about permission to copy any part of this work for redistribution or for inclusion in another document or manuscript, please call the AICPA Copyright Permissions Hotline at 201-938-3245. A Permissions Request Form for emailing requests is available atwww.aicpa.org by clicking on the copyright notice on any page. Otherwise, requests should be written and mailed to the Permissions Department, AICPA, Harborside Financial Center, 201 Plaza Three, Jersey City, NJ 07311-3881. 1234567890 SP 99 ISBN 0-87051-253-6 FOREWORD Mergers and acquisitions continue to play a vital role in business strategy. Each year thousands of accountants, lawyers, investment bankers, and business executives are involved in various stages of mergers and buy-outs that result in the transfer of billions of dollars. The experienced financial professional can play a vital role in this exciting and dynamic process. Whether the CPA serves as an outside auditor or consultant, or is a member of the management team of the company involved in the merger, acquisition, or divestuture he or she will need the comprehensive understanding of these processes that this book provides. Examples, analyses, and checklists drawn from actual transactions provide useful workproducts that can be applied by the CPA. The author of this book, Ronald G. Quintero, CPA, CMA, CFA, is a Managing Director specializing in mergers and acquisitions at the management consulting firm of Chartered Capital Advisers, Inc. He is also a partner at its turnaround advisory affiliate, R.G. Quintero and Co. Both are located in New York City. Mary Schantz Vice President, Product Development iii TABLE OF CONTENTS CHAPTER 1 - INTRODUCTION TO MERGERS & ACQUISITIONS.......... 1 Overview ............................................................................................................ 1 The Transactions ................................................................................................ 1 The Professionals................................................................................................ 3 EXHIBIT 1-1 Merger & Acquisition Milestones.............................................. 6 EXHIBIT 1-2 Principal Roles of Key M&A Participants ................................ 7 CHAPTER 2 - MERGERS & ACQUISITIONS.............................................. 9 Introduction........................................................................................................ 9 Establishing Acquisition Criteria........................................................................ 9 Enlisting Acquisition Intermediaries.................................................................. 11 Finding D eals...................................................................................................... 14 Screening Acquisition Candidates...................................................................... 15 Contacting Acquisition Candidates .................................................................... 16 Due Diligence .................................................................................................... 18 Transactions Involving Public Companies........................................................ 20 Alternatives to Mergers & Acquisitions ............................................................ 20 EXHIBIT 2-1 Developing Acquisition C riteria................................................ 22 EXHIBIT 2-2 Examples of the Lehman Formula.............................................. 24 EXHIBIT 2-3 A List of Useful M&A Information Sources.............................. 25 EXHIBIT 2-4 Example of an Acquisition Weighting System.......................... 26 EXHIBIT 2-5 Key Elements of a Typical Information Memorandum..............27 EXHIBIT 2-6 Example of a Businessperson's Review Checklist...................... 31 CHAPTER 3 - SALES AND DIVESTITURES .............................................. 37 Introduction........................................................................................................ 37 Motives for Selling ............................................................................................ 37 Developing a Marketing Strategy ...................................................................... 38 v Packaging Your Company for S a le .......................................................................40 Developing the Sales Pitch ...................................................................................42 Identifying Potential Buyers .............................................................................. 43 Initiating the Contacts ........................................................................................ 44 Controlling Buyer Due Diligence .........................................................................45 Alternatives to Selling the Company.....................................................................47 EXHIBIT 3-1 Key Elements of an Agreement with an Investment Intermediary...................................................................................49 EXHIBIT 3-2 Pro Forma Operating Cash Flow............................................... 50 EXHIBIT 3-3 Pro Forma Balance Sheet ......................................................... 51 EXHIBIT 3-4 Buyer Evaluation F o............................................................. rm 52 EXHIBIT 3-5 Buyer Grading F o rm................................................................. 53 CHAPTER 4 - PRICING THE TRANSACTION............................................ 55 Introduction........................................................................................................ 55 Rules of Thum b.................................................................................................. 56 Asset-Based Valuation Methods ........................................................................ 57 Capitalization Methods ...................................................................................... 58 Comparable Company Methods.......................................................................... 58 Comparable Acquisitions Methods .................................................................... 59 Discounted Cash Flow Analysis ........................................................................ 60 Leveraged Buyout Methods................................................................................ 61 Applying the Results .......................................................................................... 61 EXHIBIT 4-1 Examples of Selected Valuation Methods.................................. 63 EXHIBIT 4-2 Examples of Asset-Based Valuation Methods .......................... 64 EXHIBIT 4-3 Examples of Capitalization Methods.......................................... 65 EXHIBIT 4-4 Example of Comparable Company Method Based on Stock Price Capitalization .......................................................................66 EXHIBIT 4-5 Example of Comparable Company Method Based on Total Market Capitalization.................................................................. 67 EXHIBIT 4-6 Example of Comparable Acquisitions Method Based on Purchase Price of Common Stock.............................................. 68 EXHIBIT 4-7 Example of Comparable Acquisitions Method Based on Total Purchase Capitalization.............................................................. 69 vi EXHIBIT 4-8 Examples of Discounted Cash Flow Analysis............................ 70 EXHIBIT 4-9 Example of Leveraged Buyout Method.......................................71 EXHIBIT 4-10 Historical and Projected Cash Flow ...........................................72 EXHIBIT 4-11 Elements of a Valuation Report.................................................. 73 CHAPTER 5 - STRUCTURING THE TRANSACTION................................ 75 Introduction...........................................................................................................75 Mergers .............................................................................................................. 75 Stock Purchases.....................................................................................................77 Asset Purchases.....................................................................................................78 Forms of Consideration...................................................................................... 79 EXHIBIT 5-1 Making a $2.5 Million