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What are the Drivers that Affect Accretion / Dilution? - YouTube
Channel: Wall Street Mastermind - by Sam Shiah
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OKAY BUT LET'S SAY LIKE A DEAL IS
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NOT... THE DEAL IS NOT ACCRETIVE.
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HOW DO YOU... WHAT ARE THE DIFFERENT DRIVERS
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THAT YOU CAN ADJUST THERE TO AFFECT THE
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ACCRETION DILUTION.
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ONE OF THE THINGS WE COULD DO IS KIND
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OF SIMILAR TO WHAT I MENTIONED EARLIER
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IN AN LBO.
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TRYING TO PURCHASE THE COMPANY
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FOR LESS.
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AND BY DOING THAT, YOU'RE
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OBVIOUSLY SPENDING LESS THEREFORE COULD
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BECOME AN ACCRETIVE DEAL.
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2ND THING I WOULD MENTION IS
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THE TYPES OF COST OF CAPITAL YOU'RE USING
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TO FUND THE DEAL.
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SO IF YOU'RE USING 50% CASH,
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50% DEBT, MAYBE TRY TO INCREASE THE PERCENTAGE
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TOWARDS CASH,
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SO LIKE 70:30 INSTEAD TO SEE IF THAT
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WORKS IN YOUR FAVOR.
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ANOTHER THING IS MAYBE INCREASE THE
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ASSUMPTIONS ON HOW GOOD THE COST AND
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REVENUE SYNERGIES ARE GOING TO BE
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BASED AFTER THE DEAL HAPPENS BECAUSE THAT
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COULD ALSO HAVE A FACTOR IN HOW
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ACCRETIVE OR DILUTIVE THE DEAL IS.
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BUT YEAH,
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THOSE ARE A FEW THINGS THAT WE COULD
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ADJUST TO SEE AND GET THAT
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ACCRETION INTO OUR FAVOR.
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OKAY. WHAT YOU SAID IS NOT WRONG.
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I THINK 2ND AND 3RD ONE,
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I WOULD PROBABLY SAY SLIGHTLY DIFFERENTLY.
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I THINK THE WAY
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I WOULD JUST SAY IT'S LIKE,
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THE DRIVERS FOR ACCRETION/DILUTION
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ARE... THERE'S THREE MAIN ONES.
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ONE, HOW MUCH YOU PAY. AND TWO IS HOW
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YOU PAY. THE 3RD ONE IS
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WHAT ARE YOU GETTING FOR THE PRICE
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THAT YOU'RE PAYING.
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SO LET ME EXPLAIN THAT.
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HOW MUCH YOU PAY IS PRETTY SELF EXPLANATORY
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IF YOU PAY A HIGHER PRICE FOR
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THIS COMPANY, IT'S GOING TO BE LESS ACCRETIVE.
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AND IF YOU PAY A LOWER PRICE,
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THAT MEANS YOU'RE GETTING A BETTER DEAL SO
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IT'S GOING
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TO BE MORE ACCRETIVE.
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SO YOU CAN TRY TO GET THE BEST PRICE YOU
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CAN. SECONDLY,
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HOW YOU PAY REALLY COMES DOWN TO
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WHAT TYPE OF...
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WHERE IS THE MONEY COMING FROM?
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ARE YOU PAYING FOR THIS DEAL WITH CASH
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SITTING ON THE BALANCE SHEET, OR
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DO YOU HAVE TO GO OUT AND TAKE
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ON NEW DEBT, OR ARE YOU ISSUING NEW
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SHARES AND EQUITY
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IN EXCHANGE FOR THIS COMPANY?
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BECAUSE THE COST OF CAPITAL IS LOWEST
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FOR CASH, THEN DEBT, THEN IT'S HIGHEST FOR
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EQUITY. SO THE LOWER YOUR OVERALL WEIGHTED
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AVERAGE COST OF CAPITAL IS FOR THE
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DEAL, THE MORE ACCRETIVE IT'S GOING TO
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BE.
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YOU SAID IT'S THE COST OF CAPITAL TO
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FUND A DEAL.
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YES,
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IT IS THAT. BUT I WOULD ACTUALLY DESCRIBE
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IT MORE AS LIKE,
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IT'S
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HOW YOU PAY FOR THE DEAL.
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IT'S THE MIX BETWEEN CASH VERSUS DEBT
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VERSUS EQUITY. AND IT'S THE CONSIDERATIONS USED.
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THE LAST PART IS TO INCREASE
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THE ASSUMPTION OF HOW GOOD THE COST AND
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REVENUE SYNERGIES ARE
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GOING TO BE. YES,
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IT'S COST AND REVENUE SYNERGIES,
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BUT IT'S NOT JUST SYNERGIES.
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SYNERGIES IS LIKE,
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YOU KNOW WHAT HAPPENS WHEN YOU COMBINE TWO
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COMPANIES AND ONE PLUS ONE EQUALS TWO.
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BUT YOU CAN ALSO ACTUALLY MAKE
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DIFFERENT ASSUMPTIONS ABOUT HOW THE
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TARGET COMPANY IS GOING TO PERFORM ON
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A STANDALONE BASIS BEFORE YOU ADD IN
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THE SYNERGIES.
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SO WHEN YOU ACQUIRE A COMPANY,
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LIKE YOU'RE GONNA HAVE TO PROJECT OUT...
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AS A BUYER,
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YOU'RE GONNA HAVE TO PROJECT OUT
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WHAT YOU THINK THE COMPANY IS GOING
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TO DO
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IN TERMS OF REVENUE AND EBITDA.
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LIKE BASICALLY THE ENTIRE
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FINANCIAL FORECAST.
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TYPICALLY THE SELLER WILL GIVE YOU
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THEIR OWN FORECAST.
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JUST LIKE
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WE'RE GONNA DO THIS MUCH.
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TYPICALLY
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YOU TAKE THE SALES FORECAST AND
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YOU ASSUME THAT'S LIKE THE UPSIDE CASE.
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THAT'S THE OPTIMISTIC SCENARIO
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BECAUSE THEY'RE ALWAYS GOING TO PRESENT
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THE BEST LOOKING NUMBERS POSSIBLE BECAUSE
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THEY WANT TO FETCH A HIGHER PRICE.
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BUT THAT DOESN'T MEAN YOU'RE GONNA
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TAKE THEIR NUMBERS AT FACE VALUE.
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TYPICALLY WHAT MOST BUYERS WILL DO
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IS THEY'LL CREATE THEIR OWN SET OF
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FORECASTS,
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WHICH HAIRCUTS,
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EVERYTHING THAT THE SELLERS SAID.
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YOU THINK YOU'RE REVENUE IS
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GOING TO GROW AT 20% WHILE I'M ONLY
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GONNA ASSUME IT'S GONNA GROW AT 15%.
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THE MARGIN IS GOING TO BE 50%.
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WHILE I'M GOING TO ASSUME IT'S ONLY
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40%. LIKE JUST TO BE SAFE.
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BECAUSE YOU'RE
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PROBABLY EXAGGERATING A LITTLE BIT.
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YOU'RE PROBABLY LIKE PADDING THOSE STATS.
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IF THE DEAL DOESN'T LOOK GOOD ON
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MY DOWNSIDE CASE,
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I WOULD SAY,
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MAYBE I'M LIKE HAIRCUTTING IT
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TOO MUCH.
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MAYBE I NEED TO BRING IT BACK UP
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A LITTLE BIT.
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MAYBE THEIR FORECAST IS MORE
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CREDIBLE THAN I THINK.
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ONE OF THE MOST EXTREME SCENARIOS
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LIKE MAYBE I'LL JUST USE THE MANAGEMENT CASE.
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MAYBE I'LL JUST USE WHAT THE SELLER GAVE ME.
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WHEN I USE THE SELLER'S NUMBERS,
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THIS DEAL LOOKS GREAT.
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I MEAN, YOU PROBABLY WON'T DO THAT.
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YOU COULD.
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SO THAT'S THE DISTINCTION I'M
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MAKING. IT'S NOT JUST THE SYNERGY
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ASSUMPTIONS,
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IT'S ALSO HOW YOU ASSUME THE TARGET
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COMPANY WILL PERFORM ON A STANDALONE BASIS
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ALREADY.
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THAT COULD BE ADJUSTED TOO.
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AND THEN OF COURSE,
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YES, YOU CAN ALSO ADJUST THE SYNERGIES SO
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YOU CAN ADJUST BOTH AND KIND OF LIKE
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ACTING ON TOP OF EACH OTHER.
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SO THESE ARE LIKE LITTLE THINGS,
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BUT IT'S ENOUGH,
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FOR ME TO SAY YOUR ANSWER IS NOT
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100% ACCURATE.
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AND SO IT'S JUST GOOD TO KNOW.
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YOU WANT TO BE AS
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PRECISE AS POSSIBLE.
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YEAH, OF COURSE.
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I MEAN, I APPRECIATE THE TIPS AND HOW
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I SHOULD CHANGE MY ANSWERS.
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YEAH, THIS IS DEFINITELY VERY HELPFUL.
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MHM
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