Mergers and LBO Valuation Model

Description
In an LBO, the goal of the investing company or buyer is to make high returns on their equity investment, using debt to increase the potential returns. The acquiring firm determines if an investment is worth pursuing by calculating the expected internal rate of return (IRR), where the minimum is typically considered 30% and above.
The IRR rate may sometimes be as low as 20% for larger deals or when the economy is unfavorable. After the acquisition, the debt/equity ratio is usually greater than 1-2x since the debt constitutes 50-90% of the purchase price. The company’s cash flow is used to pay the outstanding debt.
A merger and or acquisition (M&A) analysis is an extension of corporate models. In general, M&A models use principles from both corporate models and project finance models. Corporate models provide the base operating data and historic analysis for M&A models. The base data in corporate models include all of the operating and depreciation data (the depreciation data be changed depending on the tax treatment of the acquisition). The base data is changed In this picture a sources and uses of funds analysis is displayed as well as a display of the equity IRR earned on the transaction and the accretion or dilution in earnings per share. These are statistics that in one way or another are shown on all of the models on this page. This page includes a description of an acquisition model with a proforma balance sheet, alternative debt funding, and risk analysis. A video reviews how to use the file in financial analysis. Videos that describe various aspects of building the model are described. Videos also describe how to construct a detailed cash flow waterfall in a leveraged buyout model.