Cementing Our Knowledge of Mergers and Acquisitions
by Lindsay Hayden McCorkle, MBA ‘15 (4/2/14)
Up until last week, I usually heard the term “synergies” when people were making fun of consultants. As a term that is over-utilized and rarely realized, I began the week of our first Merger/Acquisition (M&A) case by trying to understand why an acquisition of Texas Industries (TXI), a company with a significant amount of expensive debt and weak, albeit improving, financial performance, would be a good idea and how exactly it would create synergies. We were asked to build a model of the recently announced Martin Marietta Materials (MLM)/TXI transaction as it currently stands, in addition to building a case for whether Vulcan Materials (VMC) should make a bid for TXI.
While I had some loose knowledge of previous industries we’ve covered, like cable and teen retailers, I had no idea what kind of raw materials comprised the homebuilding materials industry. After getting past initial vocabulary hurdles (what exactly are “aggregates”?), it was time for a deeper dive into the strategic and, more importantly, financial rationale behind the deal.
Understanding an acquisition of TXI required careful analysis of their Net Operating Losses (NOLs) and the ability to utilize them in the context of an M&A transaction. Section 382 Limitation, anyone? One of the key accretion drivers of a TXI deal was indeed the tax shield provided by their NOLs; ignoring this impact would have made the deal dilutive to MLM.
When the NOL impact was combined with benefits such as the refinancing of TXI’s existing debt, cost synergies, and some possible revenue synergies, my team decided an acquisition of TXI would be very accretive for VMC shareholders. Modeling in the NOLs along with other synergies, it was apparent how impactful these adjustments can be during a merger, even with a company that doesn’t have a profitable recent history. Of course, we needed to be mindful to propose a deal structure that would preserve the value of these NOLs.
While it may sound like we got there fairly quickly and gracefully, it took lots of logic tests, sometimes circular discussions, and quick references to accounting textbooks. I learned an incredible amount from my teammates during the modeling process. Between their thought process behind some of the assumptions and their knowledge of modeling debt refinancing, I was both impressed (and felt really lucky to have them for such a complicated case!) and confident that we delivered a high quality analysis to the client.