M&A: Buy-Side Transactions: Rapid Fire

The whole buy-side workflow on one sheet: capability gates, valuation, defenses, tax, financing, and bid sequence.

Which One-Liners Win Points?

• Financial capacity is a separate test from valuation. A deal can clear the DCF model and still be infeasible if funding breaches covenants, loses investment-grade rating, or over-dilutes shareholders. Strong currency invites stock; weak currency invites cash plus debt.
• Trading comps are a no-control-premium read; precedent transactions often reflect control value. Terminal value can materially affect a DCF output, so sensitize it. LBO output is a case-specific cross-check, not a universal floor.
• Board approval BEFORE the ownership threshold is crossed can prevent a state statute from applying to a friendly deal (control-share, fair-price, business-combination). The reverse triangular merger is the most common structure since the target survives, preserving contracts and licenses.
• Indication of Interest (IOI) is a RANGE, generally non-binding; Letter of Intent (LOI) is a POINT whose binding effect depends on its own language (price usually non-binding; exclusivity, break fees, confidentiality often bind).
• A "fully financed" bid means financing is NOT a closing condition, backstopped by a bridge letter. The buy-side banker reviews the seller's CIM and confidentiality agreement; preparing the CIM is sell-side work.

Which Numbers Matter Most?

Thresholds, sunset periods, synergy-capture rates, control premiums, terminal-value shares, LBO structure, and credit-metric bands are statute-, plan-, or case-specific; the exam tests the framework, not a memorized universal number.

Which Gotchas Trip Students Up?

• The poison pill trigger is BENEFICIAL ownership, not record ownership; the pill is defeasible, so a bidder who wins board control can neutralize it. A control-share statute restricts VOTING rights, not OWNERSHIP rights; thresholds are jurisdiction-specific (Ohio is a commonly cited model).
• The fair-price statute does NOT block tender offers; it blocks the LOWER back-end leg, and a uniform-price offer clears it. Do not memorize one state's business-combination figures as universal; Delaware (15% trigger, 3-year freeze, 85%-or-more exception, two-thirds disinterested-vote exception) is well-known, but states set their own terms.
• Type B is strict: only voting stock, no cash boot (even one dollar blows it). Type C allows up to 20% non-voting; Type A is more flexible.
• The JOINT §338(h)(10) election is NOT available for a standalone C corporation (double taxation); only S corps and consolidated-group subsidiaries qualify. A standalone C-corp buyer may make a UNILATERAL §338(g) election.
• Revenue synergies are less certain than cost synergies; stress-test separately rather than assuming full realization. Accretion/dilution flips on the RELATIVE earnings yield (inverse of P/E), only cleanly in the no-premium, no-synergy case.
• Covenant compliance and rating-agency reaction are separate, binding checks; either can make a deal infeasible. Unocal and Revlon are TARGET-side duties, not the buyer's own board; Revlon is triggered by sale INEVITABILITY, not a sale offer.

How Does the Buyer Analyze, Value, and Finance the Deal?

• Three go/no-go gates: strategy, resources, capacity. Rationale: cost synergies, revenue synergies, strategic positioning, financial engineering. Six target lenses: financial results, future prospects, market position, industry dynamics, strategic value to the buyer (BUYER-SPECIFIC), potential synergies.
• Trading comparables: peer multiples (enterprise value to EBITDA, earnings before interest, taxes, depreciation, and amortization; EV/sales, EV/EBIT, P/E) give a no-control-premium range. Precedent transactions often reflect control value. DCF: cash flow plus terminal value at the weighted-average cost of capital (WACC); TV = FCF_final × (1+g)/(WACC−g).
• LBO: max price clearing the sponsor's internal rate of return (IRR) hurdle (GROSS, not net to limited partners). Pro-forma EPS = (combined net income + after-tax synergies − after-tax financing cost) / pro-forma shares.
• Poison pill: flip-in dilutes the acquirer, flip-over dilutes into its own equity. Staggered board: only part stands each cycle. Control-share/fair-price statutes neutralize voting power and two-tier pricing; business-combination statutes delay deals with an interested stockholder.
• Tax deferral applies only to the stock portion; boot is taxable, acquirer takes carryover basis. Continuity tests: ownership interest, business enterprise, business purpose, step-transaction. Types: A (statutory merger), B (stock-for-stock, 80%+), C (stock-for-assets, 20% boot), D (divisive), E (recapitalization), forward/reverse triangular (target survives in reverse, 80%+ voting stock).
• The §338(h)(10) election gives a stepped-up basis. Credit metrics: debt/EBITDA, EBITDA/interest, FFO/debt. Financing menu: cash/revolver, bridge loan, term loan B, high-yield bonds, mezzanine, convertibles, equity, seller financing/earn-outs (LBO seniority: secured, subordinated, mezzanine). Diligence findings (working-capital deficit, quality-of-earnings shortfall, off-balance-sheet liabilities, customer concentration) drive price cuts or walkaway.

One-Breath Recap

The buy-side banker gates the deal on whether the acquirer can execute (strategy, resources, capacity), then reviews the seller's CIM and values the target four ways: trading comps (no control premium), precedent transactions (often control value), DCF (terminal value sensitized), and LBO (sponsor-price cross-check). The banker diagnoses defenses (prior board approval can sidestep control-share, fair-price, and business-combination statutes), coordinates tax structure (the reverse triangular merger preserves contracts; deferral rides only the stock portion), and arranges financing, converging into a two-step bid: an Indication of Interest range, then a Letter of Intent, inside the target board's Unocal/Revlon backdrop.

Need more than the recap? Read the full M&A: Buy-Side Transactions unit.