Financial Modeling

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EUROMONEY EUR OMONEY TRAINING ......................................................................................................

Focused Financial Training for Professionals by Professionals

M&A Consul Consultants tants Investment Bankers Finance Directors CFO’s Training Managers

FINANCIAL MODELING FOR MERGERS & ACQUISITIONS November 4-7, 2008 May 12-15, 2009 New York City

A 4-day computer based program with case studies and workshop sessions featuring:

M&A and Structure of Financial Models Standalone Valuation in a Merger Transaction Risk Assessment and Cost of Capital Synergy Analysis Leveraged Buy-outs Accounting and Financing Structures in M&A Technical Project Finance Modeling Issues

INFORMATION HOTLINE:

Tel: (212) 361-3299 Fax: (212) 361-3499 email: [email protected] Web: www.euromoneytraining.com/americas

Financial Modeling for Mergers & Acquisitions COURSE SUMMARY Financial modeling for mergers and acquisitions is an intensive hands-on course in which attendees receive comprehensive instruction instructio n on modeling economic, financial and strategic issues associated with mergers and acquisitio acquisitions. ns. After describing general issues in mergers and acquisitions, the course covers programming and model structuring where attendees follow the lead of the instructor in building their own model. As the course progresses, attendees perform more work on an independent basis using two comprehensive case studies. Attendees will build a complete financial model in the context of M&A. To demonstrate various financial and modeling concepts, participants will also complete focused computer exercises. exercise s. In addition to building their own models, the course will cover how to use fully developed models that incorporate sophisticated sophisticated M&A concepts. By the end of the course, participants will be able to program and apply simulation,, real options and tornado diagrams in the simulation models they have developed on their own. In the process of learning how to develop models for M&A analysis, the course addresses a wide variety of programming, financial, statistical and economic issues. Financial issues include valuation analysis, the theory of synergies, the currency used in a transaction and accounting accounting for transactions transactions and credit analysis of leveraged buyouts. Statistical concepts addressed in the course include measurement of volatility, mean reversion and boundary conditions associated with economic time series. The programming issues include designing macros relevant for project finance models, auditing financial models, circularity associated with interest during construction, modeling of debt service reserves and organizing financial models for effective presentations.

RESOURCES RECEIVED BY PARTICIPANTS Other than the most important item – knowledge of how to  build, use and analyze financial models models in an M&A context – participants in the course will receive many other resources. Participants will be provided with the following software: • Basic corporate model with macros and instruction instructionss to create comprehensive analysis; • Fully developed financial models with debt structuring structuring,, debt sizing, contract pricing and sensitivity analysis; • Time series software that incorporates volatility, mean reversion and other parameters into models; • Monte Carlo simulation software that combines times series analysis with financial modeling; • Software that computes implied volatility and option pricing using the Black Scholes model; • Yield spread models that compute required yield spreads on project finance debt form time series analysis; • Corporate modeling software that extends project finance models to evaluate valuation of entire corporations;

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• Forward pricing software that projects prices from marginal cost analysis; • A variety of macro exercises that compute debt capacity, capacity, resolve circularity, develop tornado diagrams and construct vintage depreciati depreciation. on. Participants will also be provided with extensive data bases on actual projects, commodity price history and case studies. Finally, participants will receive a manuscript from the book Valuation and Forward Pricing of Capital Intensive Investments .

COURSE OUTLINE Financial modeling modeling for M&A is designed as a four day course. For purposes of the outline, each of the four days is divided into two modules, resulting in a total of eight modules for the entire course. The outline below presents teaching objectives, lectures and case work in each of the different modules.

COURSE DIRECTOR Edward Bodmer has created innovative forward pricing, productivity measurement and investment valuation software for consulting clients throughout throughout the United States, taught energy economics and finance throughout the world, and formulated significant government policy and corporate strategy in the U.S. Mr. Bodmer’s consulting clients include investment banks, commercial banks, research institutions and government agencies on a wide variety of complex valuation and advisory matters.

He has constructed a unique framework for electricity price forecasting and valuation using production cost modeling techniques combined with option price theory and Monte Carlo simulation. Mr. Bodmer is also an adjunct professor at Lewis University where he teaches courses in microeconomics. Along with his practical experience that covers a multitude of major advisory projects, he has taught specialized courses courses in financial modeling, electricit electricity y pricing, option valuation, mergers and acquisitions and contracting to investment  banks, commercial banks, industrial corporations and electric utility companies. Mr. Bodmer was formerly Vice President at the First National Bank of Chicago where he directed analysis of energy loans and also created financial modeling techniques used in advisory projects. projects. He has used the models in providing expert testimony on subjects ranging from capital structure to investments in multi-bil multi-billion lion dollar nuclear plants to complex valuation of new investments. Mr. Bodmer received an MBA degree specializing Mr. specializing in econometrics econometr ics from the University of Chicago and a BS degree in finance from the University of Illinois. He has written many articles and is in the process of completing a textbook on valuation of electricity assets.

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4-Day Agenda

MODULE I: Day 1 Morning: Introduction to M&A and Structure of Financial Models The course begins with introducto introductory ry comments about the skills for effective modeling and general objectives in financial modeling modeling for M&A transactions. After the introductory introducto ry discussion, the course covers the empirical evidence on the performance of M&A endeavors. Issues include: Is there and economic rational for mergers? After an acquisition has been completed, how s hould we determine whether it has been a success or a failure? Can we find any successful mergers? Not with-standing the media hype, have what is the empirical evidence on the success of mergers? What does a real-world real-world M&A model look like? What are the real incentives of investment  bankers with respect to M&A transactions? How should should modeling of a merger be structured?

LECTURES • Review of Basic Terminology in M&A • History of M&A • Studies on on M&A Effectiveness • Event studies • LBO’s • Recent history • Selected Examples • Financial Statement Review for M&A • Stock price and financial returns • Price to earnings ratios and EV/EBITDA • Return on equity and return on capital employed • Value/Book and Value to Replacement Cost • Debt/Capital, EBIT/Interest, Debt/EBITDAX • Model Layout for M&A • Financial model overview • Transaction Transaction structure structure in M&A models • Organization Organization of M&A models CLASS EXERCISES • Exercise 1a: Review of Modeling in Actual M&A Transaction • Exercise 1b: Simple Financial Model of an Acquisition

MODULE II: DAY 1  Afternoon: Construction of Basic Financial Model Participants in the course will learn how to build a model from a blank slate. The first modeling session covers development of a basic model, given capital expenditures, expenditures, revenues and expenses. Issues addressed include: How can we make the models flexible enough to use historic financial data, future projections and estimates of residual value? What should the financial statements look like in our models? What are some of the excel rules that guide accurate and efficient development of models? How can financial models be audited to check errors that we will make? What should we do to incorporate alternative debt structures and interest during construction into the model?

LECTURES • Comments on spreadsheet style and conventions • Building block approach to modeling • Basic Mechanics of Financial Models • Separation of historical period from projection period • Sources and uses of funds statement in transaction • Cash flow, net income, equity balance, construction financing and income taxes • Construction of a balance sheet and use as an auditing tool • Conversion of Investment to Corporate Model • Historical financial statements and reconciliation • On-going capital expenditures and depreciation • Mechanics of modeling outstanding shares • Modeling of short-term debt and temporary securities • Working Capital • Balance sheet approach • Use of revenue and expense ratios • Cash flow effects • Mechanics of Adding Debt to Financial Models • Debt balance tables • Inclusion of interest expense, debt repayment and debt balance • Credit quality measures CLASS EXERCISES • Exercise 2a: Base Model Layout and Financial Statements without Debt • Exercise 2b: Addition of Debt to the Basic Model

MODULE III: DAY 2 Morning: Standalone Valuation Valuation in a Merger Transaction The second day begins with the valuation valuation discussion by introducing the concept of free cash flow in decision making. Participants will learn the mechanics of computing free cash flow from financial statements and will consider how free cash flow can be practically applied in valuation of stocks. Issues addressed include: How do investment banks come up with valuation of acquisition acquisition candidates? What are the pros and cons of various valuation methods (other than getting the answer that we want)? How do investment  banks present results of their valuatio valuation n analysis? How can we get our hands around the residual value? What multiple method is best in various industries? What does the price to earnings really really mean in terms of value generate generated d by a company? How do the mechanics of alternative valuation techniques work?

LECTURES • Discounted Free Cash Flow • Theory and economic value analysis (EVA) • Free cash flow without leverage • Cost of capital applied to free cash flow • Residual value • DCF Compared to payback rule and accounting earnings criteria • Use of Multiples in Valuing Acquisition Candidates

• Alternative Multiples (P/E, EBITDA/ Value, M/B) • Rational behind alternative multiples • Multiples in transactions versus ongoing companies • Multiples and valuation by business segments • Valuation multiples in case study

CLASS EXERCISES • Exercise 3a: Analysis of Valuation in Merger Transactions • Exercise 3b: Derivation of Implied Cost of Capital from Price Earnings Analysis • Exercise 3c: Application of Alternative Valuation Techniques in the Financial Model

MODULE IV: DAY 2  Afternoon: Risk Assessment and Cost of Capital After covering valuation, valuation, we move to risk assessment in the valuation models. Risks are evaluated through application of the cost of capital, sensitivity analysis and simulation sim ulation using volatility of cash flows. Issues addressed in this section include: What basis should be used for evaluating cost of capital given how badly the CAPM has been discredited? How do investment banks compute cost of capital in M&A analysis? What fundamental value drivers create risks in M&A modeling? Given all of the difficulties difficulties in measuring cost of capital and residual value, what alternative approaches to free cash flow should be used? What are the pros and cons of using alternative multiples in valuing acquisition acquisiti on candidates? How can tornado diagrams be applied in M&A applicatio applications? ns? How useful are option pricing concepts related to creating time series equations with volatility and using Monte Carlo Simulation is assessment of risk?

LECTURES • Cost of Capital and Decision Making Investment decisions and cost of capital • Cost of capital and valuation • Cost of capital applied to free cash flow • CAPM and its limitations • Computation of Cost of Capital using Alternative Methods • Dividend growth model • Debt capacity model • Risk premium method • Implied cost of capital in financial ratios • Merton model in valuation of equity • Implied cost of capital from reverse engineering financial models of similar companies • Adjustments to cost of capital for taxes and leverage • Adjustments to beta for leverage • Computation of all-equity beta • Adjustments for interest expense • Risk analysis of economic assumptions assumptions • Commodity price risk • Technology risk

• Input and supply availability risk • Foreign currency and political risk

CLASS EXERCISES • Exercise 4a: Time Series Model of Copper Prices • Exercise 4b: Break-even case using Southport Minerals • Exercise 4c: Inclusion of Sensitivity Analysis and Tornado Diagram in Southport Case

MODULE V: DAY 3 Morning: Synergy Analysis A merger or acquisition acquisition involves a change in management control of assets. If management can achieve cost savings, marketing benefits or price increases through synergies, shareholder value is enhanced. Valuation of synergies depends on specific circumstances, but some common principles apply. apply. Issues in the synergy part of the course included: Where to companies involved in acquisitions say that synergies come from? How should the value of synergies be related to the amount of money paid for an acquisition? acquisiti on? How are synergies estimated in transactions given the short time frame for completing transactions and the confidential nature of much data? What statistical meth methods ods can be used to compute synergies?

LECTURES • Theory of Synergies • Optimization of asset management • Alternative types of synergies • Receipt of synergy valuation by target company or acquiring company • The synergy trap • Negative synergies • Identifying synergies • Unique synergies to acquiring company, industry or general • Economies of scale • Marketing improvements • Productivity enhancements • Negative synergies • Case studies in identifying synergies • Valuation of Synergies • Available information • Level of detail • Examples of synergy valuation • Alternative ways to achieve savings • Synergy valuation in case studies CLASS EXERCISES • Exercise 5a: Macro Exercises • Exercise 5b: Addition of Anthema assumptions to financial model • Exercise 5c: Computati Computation on of bid price with alternative cost of capital and country risk assumptions

MODULE VI: DAY 3  After  Af ternoo noon: n: Lev Levera eraged ged Buy Buy-out -outss A controversial form of acquisition acquisition is leveraged buyouts. This form of acquisiti acquisition on often involves complex capital structures with many trenches of debt and the debt has many covenants that adds difficulty to the modeling process. Issues addressed in this section include: Have leveraged  buyouts been good for the economy? What type of financial ratios and cash flow analysis is required to complete a leveraged buyout? What amounts of senior debt, subordinate subordinated d debt and mezzanine financing should be used in raising money for a leveraged buyout? How can cash flow waterfalls, asset sales, covenants and other aspects of leveraged  buyouts be modeled?

LECTURES • Review of Leveraged Buyouts • Definition of Leveraged Buyouts • Theory behind Leveraged Buyouts • Studies of efficiency from Leveraged Buyouts • Debt Structure in Leveraged Buyouts • Senior and subordinated debt • Covenants • Rating Agencies • Financial Ratios • Modeling of Leveraged Buyouts • Cash flow waterfall • Modeling the impact of covenants • Project finance model outputs CLASS EXERCISES • Exercise 6a: Review of Leveraged Buyout Case • Exercise 6b: Modeling a Complex Debt Structure in the Context of a Leveraged Buyout

MODULE VII: DAY 4 Morning: Accounting and Financing Structures in M&A A key question for management is how an an acquisition will will affect earnings per share and the general financial condition of the company after the acquisition. This section reviews issues associated with dilution and accretion effects of acquisitions. acquisitio ns. Actual financial data from companies is used in the class exercises. Issues addressed in this section section include: What are the benefits and costs of using multilatera multilaterall agencies? What are the various multilateral agencies that can be used? How do rating agencies assess project finance debt? How can you use project finance models to assign a risk rating?

LECTURES • Currency in an M&A Transaction • Cash payment and debt financing of M&A M&A transactions • Share exchange exchange in M&A transactions

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• Accounting with pooling of interests and purchase accounting • Mechanics of computing earnings accretion and dilution • Translation of exchange ratios into implicit prices • Combined and standalone earnings per share with different growth estimates • Modeling from alternative perspectives • Effects of financing f inancing on acquisitions acquisitions • Actual cases • Relevance for valuation • Tax effects

CLASS EXERCISES • Exercise 7a: Exercise on Accretion and Dilution using Relative P/E Ratios • Exercise 7b: Comprehensi Comprehensive ve M&A Simulation with Goodwill Accounting, Acquisition Premiums, Debt and Equity Financing and Assumption of Existing Debt

MODULE VIII: DAY 4  Afternoon: Technical Technical Project Finance Modeling Issues The afternoon module deals with miscellaneous technical issues that arise in project finance modeling. Subjects include working capital, formatting, use of data tables, depreciation, leases, and resolving circularity. The module will cover further use of macros in modeling as well as financial issues associated with the topics. Issues include: Does it matter that circularity arises in our models? Are data tables worth the hassle in model building? What should be done to include movements of working capital in the model? Can we demonstrate the basic cost and benefits of leases with a relatively simple model?

LECTURES • Circularity Macros • Alternative methods to resolve circulari circularity ty • Working with range names • Alternative ways to enter data • Use of range names • Theory and Analysis of Leases • Tax depreciation versus debt repayment • Tax reasons for using leases • Formulas for computing lease payments • Accelerated Depreciatio Depreciation n • Tax depreciation conventions • Formulas for computing tax depreciation • Vintage computations of tax depreciation CLASS EXERCISES • Exercise 8a: Computati Computation on of Lease Rates • Exercise 8b: Working Capital, Data Tables and Resolving Circularity

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Financial Modeling for Mergers & Acquisitions

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