1. Leveraged Buyouts (LBOs): when a company borrows money for the acquisition of another firm – also mentioned in the Private Equity Finchat
   1. Usually most LBOs have a high ratio of debt (ex.90%) to equity (ex. 10%) that they use to finance the acquisition
   2. Done to conduct an acquisition without committing a lot of their own capital, and hence making larger returns on equity invested
   3. Ideally the company that is being acquired should be stable enough to produce steady cash flows, as this is the main source of debt repayment
   4. Because the acquired company’s cash flows are what is used for debt repayment, sometimes they end up going bankrupt as they cannot repay the debt
   5. These are often conducted by private equity firms either to make a public company private, transfer private property or sell off a portion of a business

LBO Model: software that evaluates a leveraged buyout transaction and earn the highest possible return, as measured by the Internal Rate of Return (IRR)

1. 1. A company first lists any assumption mad about inputs and financing, followed by a collection of the company’s financial statements
   2. The statements are then used for financial modelling and to draw up a transaction balance sheet to determine the financial changes to the company after the buyout, or after recapitalization
   3. The firm’s debt and interest schedules are also analysed to model all the debt involved in the buyout, which are then assessed using several different metrics such as debt/EBITDA, interest coverage ratio, debt service coverage ratio, and fixed charge coverage ratio.

Mergers and Acquisitions: 

1. 1. 1. Merger: two firms joining forces via mutual agreement to move forward as a new single entity (the original company/ies cease to exist)
         1. Usually done through consultation of their board of directors and shareholder approval
         2. New name, structure and ticker symbol often created
      2. Acquisitions: one company buys a majority stake in another, often regarded as a hostile or unfriendly takeover
         1. The company does not change its name, legal structure or ticker symbol

• Synergy: the added value the two companies receive from joining forces; the main reason behind the merger or acquisition

1. 1. 1. Actual value and reasons of synergy vary from agreement to agreement but some examples include: cost reduction, revenue gains, tax benefits and a lower cost of capital 

Merger Model: analyzes the combination of two companies that come together through a merger or acquisition, its main steps are as follows:

1. 1. Making acquisition assumptions: the value that is to be paid/received, whether the payment will occur through cash or shares, valuation of synergies and forecasting finances and operations
   2. Making projections: using the assumptions, analysts create financial projections to determine if the merger/acquisition is worth it
   3. Valuation of each business: both the acquiring company and the target company (being acquired) are then evaluated to determine their market values
   4. Adjustments: several adjustments are made to each company’s balance sheets to value things such as goodwill, stock shares and options
   5. Deal Accretion/Dilution: a test determines the effects of the merger/acquisition on the buyer’s Earnings per Share (EPS) before closing a deal

The Bottom Line: Just like Investment Bankers, you too now have the background you need when speaking about Leveraged Buyouts, Mergers and Acquisitions!