Immersion Learning

Modeling an M&A Transaction

by Brandon Mallette, MBA ‘14 (4/3/13)
Brandon Mallette, MBA ‘14

At this point in the semester, the Investment Banking Practicum is in full swing, and for our latest assignment we had to analyze and model an M&A transaction. Mergers & Acquisitions can be very complex deals for bankers to model because you not only have to assess potential synergies of the business combination but also determine the optimal consideration to pay to the target firm. Both of these decisions have a large impact on whether a deal is accretive or dilutive, which is a key measure shareholders look at when evaluating a potential merger. An accretive deal means that earnings per share (“EPS”) increases as a result of the combination while a dilutive deal means that EPS decreases. Shareholders generally prefer mergers that are accretive to EPS.

For our M&A project, we were tasked with creating a deck that contained an overview of Chicago Bridge & Iron’s (“CB&I”) proposed acquisition of the Shaw Group (“Shaw”) and presenting it to the Board of Fluor, which was played by our classmates. In addition to modeling and analyzing the structure of the CB&I/Shaw transaction, we also had to recommend whether or not Fluor should submit a competing bid for Shaw. 

One of the first steps in analyzing this deal was to create an accretion/dilution model (“A&D model”). Earlier in the semester we completed a Wall Street Prep training course that showed us how to create the model; however, this was the first time we actually applied it in practice. In order to complete the task, we had to comb through company financials, read analyst research reports, and reference investor presentations to build out the pro forma (post-merger) financial projections. Luckily, the prior cases in the immersion have built upon one another and have taught us the necessary tools to find these inputs and complete the model.

Forecasting the pro forma financial data is only part of the analysis for an A&D model. We also learned in the practicum that the form of consideration paid to the target, whether it is cash or stock, can have a vast impact on the transaction. Therefore, when analyzing the deal we also had to test the sensitivity of the accretion figures to different levels of cash or stock paid to the shareholders of Shaw.

Lastly, after completing our initial model for the CB&I/Shaw deal, we also created one for a potential Fluor/Shaw merger to determine if Fluor should submit a bid for Shaw as well. When making this determination, we not only had to rely on the output of our new A&D model but also had to apply knowledge we learned throughout the IB immersion and our core classes regarding the strategic considerations in a business combination. Based on this comprehensive analysis, my group advised Fluor’s Board to forego a competitive bid for the Shaw Group.

Overall, this case allowed us to build upon what we learned in the Wall Street Prep modeling course and gain actual experience creating an A&D model. I believe that this hands-on experience will prove to be extremely beneficial come this summer when we are likely to be asked to complete similar tasks when staffed on M&A deals. This was the exact reason why the Investment Banking Immersion appealed to me when I was researching business schools. I thought – and now know – that it provides Johnson students with a leg up versus interns from other programs who haven’t had this level of practical experience during their first year of school.