Advanced Corporate Finance

Lorenzo Parrini

April 2017
Introduction
Course structure

Course structure
3 credits – 24 h – 6 lessons

1. Corporate finance

2. Corporate valuation

3. M&A deals

4. M&A private equity

5. IPOs

6. Case discussions

2
Lesson 1 Corporate Finance
Lesson 1 Summary

1 Financial Statement Structure

ITA GAAP vs IAS-IFRS

Recent news in ITA GAAP legislation
ITA GAAP structure
IAS-IFRS structure
Main accounting topics

2 Financial Statement Analysis

3 Business Plan

4 Company Financial Structure

5 M&A Transactions

4
Financial statement structure
ITA Gaap vs IAS-IFRS
Financial Statement is Companies’ primary informative document aimed to communicate results to stakeholders

Contents and Structure

ITA GAAP IAS - IFRS

Income Statement Income

Notes
Statement of cash flow statement
Balance
Notes
sheet
Statement
of financial
+ position

Statement
Statement
of changes
Management of cash flow
in Equity
Report

• Contents and format strictly defined by law (Italian Civil Code) • No strictly format established . IAS 1 defined only some
• Shareholders oriented required items in the P&L and some in the BS.
• Historical cost • Stakeholders oriented
• Prevalence of form over substance (eg. leasing accounting) • Fair Value estimates
• Prevalence of substance over form (eg. leasing accounting)
• No separate indication of extraordinary items

Notes: Under the new legislation of the Italian Gaap structure introduced by the Legislative Decree n. 139 of August 18, 2015, the Statement of cash flow has been included as
mandatory primary informative document
5
Financial statement structure
Recent news in ITA Gaap legislation
After the publication on the "Gazzetta Ufficiale" – n. 205 of September 4, 2015 – the Legislative Decree n. 139 of August 18,
2015 was implemented in order to transpose the European Directive 2013/34/EU.
The law is in force since January 1, 2016.
Main news
• Possibility to avoid obligations in terms of recognition, measurement, presentation
and disclosure, whenever the effects of non-compliance will be irrelevant to the true
Reporting principles and fair representation (Principle of Relevance)
• There are no more references to the economic function of assets and liabilities in
favor of the substance of the transaction

• Innovations introduced in the Balance Sheet and Income Statement documents

Financial statements
• Introduction of the obligation to prepare the Cash Flow Statement

• The treasury shares are directly deducted from equity

• Research and advertising costs are not to be shown as fixed assets: only development costs can be capitalized
Balance Sheet • Indication of the relationship between credits and debts with companies subjected to the control of the parent
• Introduction of the "Reserve to hedge expected cash flows" in the equity
• Memorandum accounts are not listed at the bottom of the Balance sheet: information will be provided in the Notes
• Specific items for derivatives have been included
• Financial income and expenses must be indicated separately from data regarding companies subject to control
Profit & Loss • Specific items added for derivatives in the financial items section
• Elimination of Class "E" relative to the extraordinary items: income and expenses will be indicated in the Notes

Cash Flow • Obligation to prepare the Cash Flow Statement. That is not mandatory for companies that prepare the short-form
Statement annual financial statements and for micro-enterprises1

• Specific information on: fair value of derivatives and respective variation; guarantees, risks and potential liabilities
Notes • Events occurred after the end of the financial year
• Information that can affect the amount, maturity or certainty of future financial flows
• Goodwill is amortized according to its useful life (or within a period that do not exceed 10 years)
Evaluation • Derivatives are recognized at fair value
criteria • Credits and debts will be represented ad their amortized costs rather than their historical or nominal value
Notes: (1) Micro-enterprises are those companies with at least two of the following characteristics: Total assets 175 €K, Revenues 350 €K, Number of employees: 5
6
Financial statement structure
ITA Gaap structure – Profit & Loss and Balance Sheet
Profit & Loss ex Codice Civile art. 2425 e 2425 bis Balance Sheet ex Codice Civile art. 2424
A) VALORE della PRODUZIONE ATTIVO

A1. Ricavi delle vendite e delle prestazioni A. CREDITI VERSO SOCI PER VERSAMENTI ANCORA DOVUTI

A2. Variazioni delle rimanenze di PiCL, SL, PF B. IMMOBILIZZAZIONI

A3. Variazione dei lavori in corso su ordinazione B I. Immobilizzazioni immateriali
A4. Incrementi di immobilizzazioni per lavori interni B II. Immobilizzazioni materiali
B III. Immobilizzazioni finanziarie
A5. Altri ricavi e proventi
Totale Valore della Produzione (A) C. ATTIVO CIRCOLANTE
C I. Rimanenze
C II. Crediti
B) COSTI della PRODUZIONE C II.1 Verso clienti
B6. Per materie prime, sussidiarie, di consumo e merci C II.2 Verso imprese controllate
B7. Per servizi C II.3 Verso imprese collegate
C II.4 Verso controllanti
B8. Per godimento beni di terzi
C II.5 Verso imprese sottoposte a controllo delle controllanti
B9. Per il personale C II.5-bis Tributari
B10. Ammortamenti e svalutazioni C II.5-ter Imposte anticipate
B11 Variazione rimanenze MP, sussidiarie, di consumo e merci C II.5-quater Verso altri
B12. Accantonamenti per rischi C III. Attività finanziarie che non costituiscono immobilizzazioni
B13. Altri accantonamenti C IV. Disponibilità liquide
B14. Oneri diversi di gestione D. RATEI E RISCONTI
Totale Costi della Produzione (B)
PASSIVO
(A-B) DIFFERENZA tra VALORE e COSTI della PRODUZIONE A. PATRIMONIO NETTO
B. FONDI PER RISCHI ED ONERI
C) PROVENTI e ONERI FINANZIARI C. TRATTAMENTO DI FINE RAPPORTO
C15. Proventi da partecipazioni D. DEBITI
C16. Altri proventi finanziari D.1 Obbligazioni
C17. Interessi passivi ed altri oneri finanziari D.2 Obbligazioni convertibili
C17bis. Utili e perdite su cambi D.3 Debiti verso soci
Totale Proventi ed Oneri finanziari D.4 Debiti verso banche
D.5 Debiti verso altri finanziatori
D.6 Acconti
D) RETTIFICHE di VALORE di ATTIVITA' FINANZIARIE D.7 Debiti verso fornitori
D18. Rivalutazioni D.8 Debiti rappresentati da titoli di credito
D.9 Debiti verso imprese controllate
D19. Svalutazioni
D.10 Debiti verso imprese collegate
Totale Rettifiche di Valore di Attività Finanziarie D.11 Debiti verso controllanti
D.11-bis Debiti verso imprese sottoposte al controllo delle controllanti
(A-B+/-C-D) RISULTATO PRIMA delle IMPOSTE D.12 Debiti tributari
D.13 Debiti verso istituti di previdenza e sicurezza sociale
Imposte sul reddito dell'esercizio (correnti, differite, anticipate ) D.14 Altri debiti
UTILE (PERDITA) dell'ESERCIZIO E. RATEI E RISCONTI

7
Financial statement structure
ITA Gaap structure – Cash Flow Statement
Under the new legislation, the Cash Flow Statement becomes a mandatory document for all entities required to
prepare the financial statements on ordinary form, adding it to the Balance Sheet, the Income Statement and Notes

Cash Flow Statement ex Codice Civile art. 2425 ter

Stand-alone document that can synthesize the

yearly financial dynamic

Article 2425 ter CC, contrary to what is usually provided by the Civil Code for the other required reports, does
not provide a rigid structure or a minimum content, but specific targets and objectives

Objectives

 Describe the amount and composition of cash and cash equivalents at

beginning and at the end of the year
 Represent cash flows for the year, arising from:

• Operating activities
• Investing activities
• Financing activities (including transactions with shareholders)
8
Financial statement structure
ITA Gaap structure – Notes
Notes ex Codice Civile art. 2427

Details of items
included in the
Evaluation Criteria
Income Statement
and Balance Sheet
Significant events
Changes in assets occurred after the
and liabilities end of the financial
year (1)

Some details deserve information in terms of financial statements analysis and valuation:
2) Changes in fixed assets, with separate indication of each items, indicating: the cost, previous changes, depreciation, (…)

4) Changes in other asset and liability items (equity, provision funds, severance indemnity, …)
7) Composition of: accruals, prepaid expenses, deferred incomes, any funds and reserves included into the Balance Sheet

9) The total amount of commitments, guarantees and potential liabilities not represented into the Balance Sheet

13) Composition of extraordinary items, whenever their amount is relevant

14) A separate prospect containing: a) description of temporary differences that led to the recognition of deferred tax assets, specifying the rate
applied and any changes with respect to the previous year; b) the amount of the deferred tax assets recorder in relation to losses during the
current or the previous period

16) The amount of remuneration paid to the board of directors and auditors, cumulatively for each category

19-bis) Loans made by shareholders to the company

22) Leasing operations

Notes: (1) This is a news introduced by the D. Lgs n. 139 of August 18, 2015. Those information were previously report in the Management Report
9
Financial statement structure
ITA Gaap structure – Management Report
Management Report ex Codice Civile art. 2428

[1] The financial statements must be accompanied by a directors' report containing a faithful, balanced and
comprehensive analysis of the situation of the company and about the performance and results of operations,
both as a whole and in the various sectors in which it operates, also through subsidiaries, particularly with
regard to costs, revenues and investments, as well as a description of the principal risks and uncertainties the
company is exposed

(…) Financial performance indicators and, where appropriate, relevant

Content financial and non-specific activities of the company (...) with reference to
the amounts reported in the financial statements and clarifications

[2] The report should in any case includes:

1) Research and development activities;

2) Relations with subsidiaries, affiliates, parent companies and companies controlled by the latter;
3) The number and nominal value of both treasury shares and shares of the parent companies held by the company (…),
indicating the corresponding part of the capital;
4) The number and nominal value of both treasury shares and shares of the parent companies that have been purchased
or sold
6) The business outlook;
6-bis) Information regarding the use of financial instruments by the company;

10
Financial statement structure
IAS-IFRS structure
Income Statement basic requirements Balance Sheet basic requirements
An entity has a choice of presenting: IAS 1 does not prescribe the format of the statement of financial
• a single statement, with profit or loss and other comprehensive income position. Assets can be presented current then non-current, or vice
presented in two sections, or versa, and liabilities and equity can be presented current then non-
• two statements: current then equity, or vice versa.
- a separate statement of profit or loss
- a statement of comprehensive income, immediately following
the statement of profit or loss [IAS 1.10A]

Minimum items Minimum items

Profit or loss section (or separate statement): a) Property, Plant and Equipment
b) Investment Property
• Revenue c) Intangibles Assets
• Gains and losses from the write off of financial assets measured d) Financial assets
at amortized cost e) Investment Accounting for using Equity Method
• Finance costs f) Biological Assets
• Share of the profit or loss of associates and joint ventures g) Inventories
accounted for using the equity method h) Trade and other receivables
• Certain gains or losses associated with the reclassification of i) Cash and cash equivalents
financial assets j) Assets held for sale
• Tax expenses k) Trade and other payables
• A single amount for the total of discontinued items l) Provisions
m) Financial liabilities (excluding amounts shown under (k) and
OCI section (or statement): (l)
n) Current tax Assets and Liabilities as defined in IAS 12
• Components of other comprehensive income classified by nature o) Deferred tax liabilities and deferred tax assets, as defined in
• Share of the other comprehensive income of associates and joint IAS 12
ventures accounted for using EM p) Liabilities included in disposal groups
q) Non-controlling interests, presented within equity
Other comprehensive income items are: r) Issued capital and reserves attributable to owners of the
• Assets revaluation parent
• Increase in financial assets available for sale
• Actuarial profit/loss
• The effects of change in foreign exchange rates
11
Financial statement structure
Main accounting topics
Ita GAAP IAS-IFRS

P&L Notes P&L BS

Amortization
Rental cost Asset
Detailed Cost
information
Financial
Financial Leasing Financial Debt
Charge

Weighted Weighted
Average Cost Applicable Average Cost
Applicable
valuation valuation
FIFO
criteria criteria FIFO
Inventory LIFO

Many Admissible Limited Admissible

Categories Categories

Amortization process
Amortization process
Intangibles Impairment test

12
Lesson 1 Summary

1 Financial Statement Structure

2 Financial Statement Analysis

Overview
Income Statement Reclassification
Balance sheet Reclassification
Income statement and balance sheet
Cash Flow Statement
Financial Ratios

3 Business Plan

4 Company Financial Structure

5 M&A Transactions

13
Financial statement analysis
Overview
Financial Statement Analysis is aimed to acquire and develop information about corporate management,
that is branched in its economic and financial aspects

 Internal PERSPECTIVE  External

 Banks and financiers

 Financial Advisors/ Analysts
 Management INTERESTED  Clients/ suppliers/ competitors
 Shareholders PARTIES  Economic research entities and
 Employees
vigilance committees
 …

 VALUATIONS REFERRED TO:

 Develop summary information  Access to credit

about corporate management APPLICATION  Income Capability
 Financial planning instrument  Financial Structure
 Management control instrument  Business Features
 ...  Cash flows Generation
 …

14
Financial statement analysis
Overview
Financial statement Analysis can be ideally divided into two steps:
1) Income statement and Balance sheet Reclassification
2) Construction and analysis of performance Ratios

Financial Statement
Ratios
Reclassification

INCOME BALANCE PROFITABILITY FINANCIAL

STATEMENT SHEET RATIOS RATIOS

Financial
Cost of sales Net Profit Cash ratios
Account

Management Financial
Added Value Operating Profit
Account Stability ratios

Contribution
Margin

CASH FLOW STATEMENT

Processing of Cash Flow Statement

15
Financial statement analysis
Income statement reclassification
The main methods of income statement reclassification highlight operating profit (characteristic activity)
from different points of view.

“Cost of sales” “Added Value” “Contribution margin”

Net Sales Net Sales Revenues Net Sales Revenues

(-) Cost of Sales (+) Other revenues and income (-) Purchases
(+/-) Variations in stock of FP and (+/-) Variations in stock of FP and and
Gross Margin
and in work in progress. in work in progress.
(-) General and Administrative costs (-) Production variable costs
(+/-) Variation in contracts in progress.
(-) Selling Costs (-) Commercial variable costs
(+) Work performed for own purposes and
EBIT CONTRIBUTION MARGIN
capitalized.
VALUE OF PRODUCTION (-) Industrial fix costs
(+) Purchases (-) Comemrcial fix costs
(+/-) Variations in stock of raw materials, (-) G&A fix costs
(+) Purchases External
(-) Cost for services EBIT
(+/-) Variations in stock of raw materials, costs
Consumption (-) Cost for use of assets owned by others
(+) Staff costs (-) Other operating charges
ADDED VALUE
(+) General industrial costs  Easy to produce by an
(+) Industrial Amortization (-) Staff costs
external analyst
(+/-) Variations in stock of work in progress EBITDA
COST OF FINISHED PRODUCTS (-) Amortization  It highlights the most
(+/-) Variations in stock of finished products (-) Depreciation and Amounts
COST OF SALES
important profit margins for
provided for risk provisions financial community
EBIT

16
Financial statement analysis
Balance sheet reclassification
The “Management Account Method” allows analyst to identify the main Asset classes that origin
financial requirement: Net Working Capital (NWC), Fixed assets (FA) and Net Invested Capital (NIC),
together with Financial sources: Net financial Position (NFP) and Equity (E).

Trade Creditors Cash at Bank and in hand

Trade Debtors Short Term
Other operating liabilities
NFP Short term Financial Debts
Stocks (Eg: amounts owed to tax
administration, to social
security) Medium/Long term
Other operating assets
(Eg: Prepayments and accrued NFP M/L Term
Financial Debts and other
liabilities
income)
NWC NFP Other medium/long term
financial assets

Tangible Assets
NIC Employee severance
Intangible Assets indemnity
FA
Investments

Other structure liabilities

(Provisions, Debts vs EQUITY
machinery’ suppliers) Other Assets/
Employee severance
indemnity
(Liabilities)

Employee severance Depending on the number of employees and on Employee severance indemnity accounting, companies with more than 50 employees can
indemnity include it in NFP as financial debt (Reform 1/01/2007)

17
Financial statement analysis
Income statement and balance sheet
The Management Account Method underlines also the coverage of net financial requirement expressed
by NIC. It helps in finding logical connections with Income statement

VALUE OF PRODUCTION
(-) External costs
ADDED VALUE NFP
(-) Staff costs
EBITDA
(-) Amortization
NIC
(-) Depreciation and Provisions
EBIT
(+/-) Financial income and charges
(+/-) Extraordinary income and charges
INCOME BEFORE TAX
(-) Taxation EQUITY
NET INCOME

18
Financial statement analysis
Cash flow statement
Cash flow Statement shows Company capability of cash generation (cash inflows) or cash absorption
(cash outflows) during the year

Main financing sources and main cash uses are:

CASH INFLOWS CASH OUTFLOWS

 Operating Cash Flow (EBITDA +/-  Decrease in capital stock (es.

Changes in NWC) Dividend distribution)

 Paying Increase in capital stock  Payment of payable loans (capital +

charges)
 Opening of loans payable (capital)
 Opening of active loans (capital)
 Proceed of active loans (capital +
interests)  Acquisition of fix assets

 Sell of fix assets  Use (payment) of provisions

 Grants received  Tax payment

19
Financial statement analysis
Cash flow statement
Cash Flow Statement highlights the generation and absorption of financial resources occurred during the
year, divided into the main management areas

Initial Cash at Bank and in Hand

EBIT (A)
Taxes on Ebit (B)
NOPLAT (C = A+B)
Depreciation and Amortization (d)
GROSS CASH FLOW (E = C+D)
Changes in NWC (F)
CAPEX (G)
Changes in Funds (H)
FREE CASH FLOW (I = F+G+H)
Financial income and charges (L)
Tax on financial area (M)
Net financial income and charges (N = L-M)
New M/L term financing (O)
M/L T financing reimbursement (P) Cash Flow Statement is a very
M/L T Financial Activities Cash Flow (Q = O-P) important input in Corporate valuation,
because it represents company’s cash
Equity increase (R)
flow production through characteristic
Dividends and other equity decrease (S)
operating activity (excluding capex)
Equity Cash Flow (T = R-S)
CASH FLOW FROM FINANCING (U = Q+T)
Extraordinary income and charges (V)
Tax on extraordinary area (W)
NET INTEREST AND CHARGES NOT OPERATIVE (X = V-W)

CASH FLOW GENERATED (ABSORBED) (W= I+N+U+X)

Final Cash at Bank and in Hand
20
Financial statement analysis
Financial ratios
Statements reclassification is also necessary for the construction of interrelated indicators that allow to
focus the analysis on economic and financial performances

Profitability Ratios Financial Ratios

Ebitda Margin% = Ebitda / Revenues Stock Turnover (DIO) = Net Revenues / Stocks

Raw Material turnover = RM stock / RM consumptions

Ebit Margin% (ROS) = Ebit / Revenues
*365
Finish Product turnover = FP stock / cost of goods

Turnover index
ROI = Ebit / NIC
sold *365
Days sales outstanding DSO=
ROE = Net Income / Equity
(receivables/(revenues*(1+VAT))*365
Extraordinary area (S) = Income before tax / Ordinary Days payables outstanding DPO=
Income (payables/(purchases*(1+VAT))*365

Tax (T) = Net Income / Income before tax NWC turnover = Revenues/NWC

ROE = [ Roi+(Roi-Rod)*NFP/E ]*S*T FIXED asset turnover = Revenues/ Fixed Assets

Debt level = NFP/Equity

Debt incidence = NFP/(Equity+NFP)

Debt ratios

NFP/EBITDA

Interest Coverage Ratio = EBIT / Interests

Debt Service Coverage Ratio = Cash Flow / (Loan

payments+ loan interests)

21
Financial statement analysis
Financial ratios

Turnover trend and  A decrease registered for 2 or more consecutive years can suggest that a decline
margins phase has started

 Lower than direct competitors: the Company is less competitive and in the medium
Ebitda Margin
term it can led to a crisis state.

Financial Charges/Ebit  Higher than 60-70%: results are vulnerable

Intangibles/Ebitda  Higher than 4-5 times: difficulty to cover amortizations and impairment

 Less than 5-6% or lower than cost of debt: the financial leverage tend to be
ROI
negative.

NFP/Ebitda  More than 5 times: doubts about pay back capability

NFP/Equity  Higher than 2 times: excessive debt dependence

22
Lesson 1 Summary

1 Financial Statement Structure

2 Financial Statement Analysis

3 Business Plan
Overview
Strategic Plan Process
Strategic Analysis
Assumptions

Financial Planning
Qualifications
Sensitivity analysis
Pre and Post Money

4 Company Financial Structure

5 M&A Transactions

23
Business Plan
Overview: aim and role
Business Plan Aim and Role
The Business Plan is an important tool for internal management and external
analysis

The BP is first of all an internal document necessary for

management as it describes the business and the future
• It defines Company strategic plans plans, but it’s also useful for external subjects.
• It shows how the Company intends to pursue Starting from the current company situation and from
What is a BP? these plans the present needs, document aim is to show
• It shows the consistency between results and Company’s future evolution. Particular focus is given to
assumptions business strengths, at the same time evidence of the
weaknesses and the actions necessary to minimize
them.

The BP is always necessary in a fund raising situation:

for banks in case of debt negotiation or re-negotiation;
for grants by Public Authority; for financial and strategic
• Internal management tool
investors in case of debt or equity investments.
What’s the
• Banks
aim of a BP? Many holding companies request the annual
• Fund raising preparation of BP to subsidiaries
Anyway the BP is first of all a fundamental instrument
for internal management and planning

24
Business Plan
Overview: potential recipients
Business Plan potential recipients
The BP must be able to meet the recipients’ needs
Recipient Key question Main topics
• Strategies
• Action plan The BP is a systematic instrument for business
management and planning and for performances
• Goals
Internal Use measurement. It allows to highlight company’s needs in
• Need of changes
terms of financial resources, human resources,
• Performance monitoring investments, etc..
• Need of external resources

• Loan amount
• Financing destination
• Payback schedule Banks are mainly interested in the comprehension of
Banks
• Capability of payment business risks.
• Corporate reaction to extraordinary events
• Available guarantees

Investors are mainly interested in the comprehension of

• Amount of Investment business outlooks, through the analysis of:
Private Equity
• Destination of Investment/Financing • Track record of the company, the management and the market,
and Stock
• Return of Investment • Comprehension of outlooks rationality,
Exchange • Possible way-out • Key drivers for company success (in particular the management)
• Clients (purchase criteria and future perspectives)

25
Business Plan
Strategic Plan Process
Components of Strategic Plan
"Yesterday – Today" "Tomorrow"

Strategy Strategic Forecast

Action plan Assumptions
pursued aims financial data

Description of: Management choices Actions which reduce

 Operative strategic Relative to key value Consistent with the
related to: the gap between drivers and forecast strategic aims and
layout  Role in competitive strategy pursued
 Performance data, with reference to: the Action Plan and
area and strategic aims;  Macroeconomic referring to:
realized in each  Value proposition in particular: magnitudes  SBUs
SBA  Creation of  Economic/financial
 Need/opportunity for  Development of  Distribution
competitive impact and timetable
strategic renewal revenues channels
advantage  Investments to be  Direct costs
made  Geographic areas
 Indirect cost,  Customer type
 Organizational financial charges
impact of the  Products/services/br
and taxation ands
individual action  Evolution of capital
 Intervention on employed
Market Analysis products/services/  Evolution of financial
Competitive Scenario brand portfolio structure
Business analysis  Actions which
change the
customer target
 Responsible
managers
 Conditions and
restrictions
regarding realizable
nature

26
Business Plan
Strategic analysis: Market Analysis

Market analysis

Market definition and Trend analysis and key Concentration levels and
Regulatory aspects
dimensioning driver analysis trend
180
160 CAGR + 10% Player 1
140 15%

120 Player 2
2%
100 Player 5 Player 3
50% 5%
80
60
40
Player 4
20 28%

27
Business Plan
Strategic analysis: Competitive scenario

Porter Model

Potential
Entrants

Suppliers Competitors Customers

Substitutes

28
Business Plan
Strategic analysis: Business Analysis

SWOT Analysis

Strengths Weaknesses

A distinctive competence? Obsolete facilities?

Internal factors Location advantages? Weak image?
Proprietary technology? Lack of managerial depth and talent?
Adequate financial sources? Poor track record?
Product innovation abilities? Vulnerable to competitive pressure?
Brand or product awareness? Below-average marketing skills?

Opportunities Threats

Likely entry new competitors?

Serve additional customer groups?
Growing of substitute product/service?
External factors Enter new market or segment?
Growing competitive pressure?
Add complementary products or
services? Vulnerability to recession and business
cycle?
Vertical integration?
Growing bargaining power of customers
Faster market growth
or suppliers?

29
Business Plan
Action Plan
Action Plan
All the action which permits the realization of the strategic aims, with specification of the impact in
financial terms and the estimated timetable for the implementation
Investments Organizational impact Portfolio
 Indication about:  In terms of:  Any measures on
 the sum total,  Business Model products/services/brand portfolio
 the type,  Managerial structure
 timetable  Corporate workforce
 Geographic areas to be covered
 Distribution channels and commercial
structure
Customer target Manager responsibility Restrictions
 The action by means of which one  The system of responsibility or rather  The conditions/restrictions which may
intends to create a possible variation indication of the managers influence the possibility of
of the customer target to serve. responsible for the scheduled action accomplishing the action.

Strategic Aim Action Timetable Cost reduction Responsibility

Reduction of production workforce by 40 units June 2015 1.000

Reducing Replacement and reduction of suppliers March 2015 3.000 Operation
operating
Rationalization of logistic flow October 2015 2.000 manager
costs
Internalization of plant maintenance and employment of specialized staff June 2015 1.000

30
Business Plan
Assumptions: Economic Plan
Macro-driver Leverage Results

Average sales prices

Contribution Margin

Revenues and
Volumes Fiscal year results
margins
Cash flows/ Self-financing/Net Financial
Position
Average purchase costs

Gross operating margin (EBITDA)

Distribution structure
Cash flows/ Self-financing/Net Financial
Logistic area
Position
Sales network
Logistic structure optimization

Gross operating margin (EBITDA)

Other operating
[…]
costs Cash flows/ Self-financing/Net Financial
Position

31
Business Plan
Assumptions: Financial Plan
Macro-driver Leverage Results

Debtors grace period

NWC Consistency

NWC trend Stock turnover Cash absorption/generation

Cash flows/ Self-financing/Net Financial

Position
Creditors grace period

Fixed Assets Consistency

New investments

Investment Cash Absorption/ Net Financial Position

Maintenance investments
Amortization Dynamics

Financial charges
Financing Debt structure
Pay-back plans

32
Business Plan
Connections Economic Plan – Financial Plan

Economic Plan Financial Plan

Trade debtors
+ Sales revenues
Trade creditors
- Purchase costs
Stocks
- Consumptions
Employee debts
- Wages and salaries
INPS, IRES Debts
- Amortization
VAT credits, debts
- Accruals
Fixed Assets
= EBIT
- M/L term financial charges
+ Financial interests Financial requirement
- S term financial charges Cash surplus

= Profit Before Tax

- TAX (IRES, IRAP) Tax Debts/ Credits

= NET PROFIT Equity

33
Business Plan
Financial Planning

INPUT
 The information needed depend on BP
purpose
Economic Plan Investment Plan
 However it’s possible to identify a minimum
set of input
Net Working
Financing Plan
Capital Hp  Economic plan up to EBITDA
 Fixed Assets amortization plan
 Investments and divestments plan
 Long term financing amortization
plan
 Net working Capital elements
Financial
Planning  Input depending on Business Plan’s purpose:
Process  NEW long term financing plan
 Dividend distribution hypothesis
 Way-out hypothesis
 Detail information

Economic – Financial Plan

34
Business Plan
Qualifications

Business plan

Financial
Consistency Reliability
sustainability

Qualifications and requirements

35
Business Plan
Qualifications: financial sustainability

Financial sustainability

1. 2.
Cash flow sufficient to cover The recourse to new
Cash flow NWC needs and net New Sources sources (Debt and Equity)
maintenance/replacement should be finalized to cover
investments financial needs relative to
growth
NWC
Investments Growth

3. 4.

Balance between type of Debt consistent with

sources and investments company’s reimbursement
capability (D/E, DSCR, risk
profile)

Sources Investments
Debt

36
Business Plan
Qualifications: consistency

Consistency
This requisite relates to an “internal” dimension of the plan and materializes where all the aspects are
consistent with one another

Strategic
Hypothesis
intentions Action Financials
Plan forecast

Compatibility between strategic choices, action plans, timetable and future available
sources (human, organizational, technological and financial)

37
Business Plan
Qualifications: reliability

Reliability

Compatibility with the Compatibility with the

dynamics of the historical results
competitive context (growth rate, NWC trend, efficiency
improvement perspectives...)

Visibility of the forecast Sensitivity analysis

data (test different scenarios)

38
Business Plan
Sensitivity analysis
Sensitivity analysis

 the main key value drivers,

To concentrate the sensitivity analysis  the most significant external sector-based variables,
on:  the most relevant implementation actions
 the possible integration of the companies recently acquired

The sensitivity analysis should be  more optimist scenarios

presented with respect to:  more pessimistic scenarios

 main economic data (for example: sales revenue, operating margin,

Demonstrating the effect on: net profit)
 main financial data (for example: net financial position, investments)

 to be supported by detailed and justifiable theories

The simulations will have  the results will have to be comparable in terms of parameters/indexes
utilized.

AIM:
Demonstrate economical and financial sustainability even in less probable, but
possible, scenarios

39
Business Plan
Pre and Post Money

Pre-money BP Post-money BP

Before capital After capital

increase increase
Investor entry in target
company equity

Pre-money Post-money
company value company value
If the investor entry took place
through the equity increase:
Y
X
0
40
Lesson 1 Summary

1 Financial Statement Structure

2 Financial Statement Analysis

3 Business Plan

4 Company Financial Structure

Financing sources
Risks and performances

Financing sources: Company life cycle

5 M&A Transactions

41
Company Financial Structure
Financing sources
Financial sources used for financing company’s activity can be classify in respect to
 the nature of the financing tool;
 the nature of the financier
External Internal

(bank side) (market side)

Traditional bank debt Bond loan Shareholders loan

• short term
Mini bond
• medium-long term
Debt
Structured finance Structured finance
Nature of the Financing tool

Project Financing Securitization

Mezzanine Convertible B.L. Participation financial

Hybrid B.L with warrant tools
Hybrid
Participating
financial tools

Ownership Equtiy Self financing

(Private Equity / Venture
Shares (shareholder’ s capital
Capital/IPO/ new strategic
Equity increase)
investors)
Warrant
Warrant

42
Company Financial Structure
Financing sources
Different financing tools have different risk-performance relationship.

Common stocks - Majority

Performance expected

Common stocks - Minority

Preferred Stock
Participatory Financial Instruments
Convertible debt Mezzanine

Junior Debt with warrant

Junior Debt without warrant
Senior Debt

Related risk

A company chooses the best mix related to its status and needs.
43
Company Financial Structure
Risk and performance

Senior debt

 Cheapest and main source of finance

 Secured and usually unrated

Repayment • Term loans with fixed repayment schedule

Tenor • 6 years or less (amortization gives a 3-4 year average life)

Interest rate • EURIBOR +2 to 4% but it depends on country and risk

Mid market leverage

• 3.4x EBITDA (Thomson Reuters)
multiple

Lender • Mainly banks

Structure • Senior tranches often structured as two or more tranches (A, B, C and sometimes D)

Use • Revolving loans can be used for cyclical firms

44
Company Financial Structure
Risk and performance

Mini Bond
 Term is used to refer to debt securities (bonds) made easier due to package of reforms introduced by Decreto Sviluppo,
Decreto Sviluppo bis and Decreto Destinazione Italia.
 Aim is to facilitate access by small and medium sized companies (SMEs) and unlisted companies to capital markets as
alternative method of funding and thereby encouraging economic growth.
 Main effect of the reform is a reduction of legal and tax restrictions if the securities are traded on a regulated market or
multilateral trading facility such ExtraMOT Pro.
o Withholding Tax: issuer no longer required to apply 20% withholding tax on interest;
o Deductibility of Interest
o Deductibility of costs of issuance
o Disapplication of limit of no more than twice the aggregate of a company's equity

Repayment • Term loans with fixed repayment schedule

Tenor • 3-7 years (amortizing or bullet repayment)

Interest rate • average 6-7% but it depends on company and risk

Lender • Professional investors

45
Company Financial Structure
Risk and performance

Junior debt
 Subordinated to senior debt on interest and capital. Subordination can be achieved:
o Contractual via an inter creditor agreement
o Structural – a creditor lend or invest in a company through a holding company
 The cost is higher than senior debt because of poor quality security
 Secured by: second charge on fixed assets, subordinated to senior debt, based on excess cash flow

Tenor • 5-10 years

Interest rate • cash coupon of EURIBOR +3% - 7%, with target IRR of 15% - 25%

Mid market leverage

• 1.3x EBITDA (Thomson Reuters)
multiple

Lender • Professional investors and seller

46
Company Financial Structure
Risk and performance

Mezzanine debt
 Financing source between a company's senior debt and equity: subordinate in priority of payment to senior debt, but
senior in rank to common stock or equity.
 More expensive than senior debt but less rigid
 Secured by a second or third charge on assets
 Target lower interest rate with participation in equity or performance: warrants, payments linked to performance

Repayment • Bullet payment

Tenor • 8-10 years

Interest rate • EURIBOR + 7% to 11% and some maybe rolled up into a PIK contract

Mid market leverage

• 3.4x EBITDA (Thomson Reuters)
multiple

Lender • Professional investors

Payment In Kind
• Non standard hybrid instrument
• Total return target of 20-25% IRR in two parts
 contractual return (semi annual accretion)
 warrants
• Usually structurally subordinated to debt
• Some prepayment restrictions

47
Company Financial Structure
Risk and performance

Equity

Shareholders • Equity increase by existing shareholders

Stock Exchange • Listed in MTA, Star segment and AIM

Private Equity • Equity increase by financial investors

• Financing for start-up companies or companies with a high risk profile that offer the
Venture capital
potential for above average future profits.

48
Company Financial Structure
Financing sources: Company life cycle
In relation to Company’s life cycle phase there are typical extraordinary transactions

EV Capital increase / Convertible

loans
Bond Loan
Bond Loan / High Yield
IPO
M&A
M&A
Maturity Debt
Bridge Equity/ Easy restructuring
Financing

Capital for Turnaround

growth
Seed
Capital
Start-up

49
Lesson 1 Summary

1 Financial Statement Structure

2 Financial Statement Analysis

3 Business Plan

4 Company Financial Structure

5 M&A Transactions

The role of corporate finance in M&A transaction

Acquisition
Contribution
Merger
Spin off

50
M&A transactions
The role of corporate finance in M&A transaction
An extraordinary corporate transaction represents an important discontinuity phase during a company life
cycle. It’s aimed at supporting the operating growth path, with the objective of creating value.
Operations unrelated to ordinary management

M&A corporate
Internal /external (they involve the company and current
transactions shareholders/ they involve other external players)

They reflect on corporate structure and on governance

Acquisition Merger

M&A
transactions

Contribution Spin off

51
M&A transactions
Acquisition
The Acquisition is the operation trough which a subject buys the ownership of a company, or a line of
business, in order to assume the control.

Company A Company B

Legislation  Art 2556 – 2560 Italian Civil Code

 Attention to staff debts and fiscal debts (D.lgs 472/1997)

52
M&A transactions
Acquisition: accounting implications
Accounting implications

Before Acquisition

Seller Balance Sheet Buyer Balance Sheet

Assets 1000 Equity 100 Cash 1000 Equity 1000
Debt 900

After Acquisition

Seller Balance Sheet Buyer Balance Sheet

Assets 1000 Equity 100 Cash 800 Equity 1000
Cash 200 Debt 900 Asset 1000 Debt 900
Capital Gain 100 Goodwill 100

Economic Value of Acquisition = 200

Notes: assumption that historical values are equal to fiscal values

53
M&A transactions
Acquisition: tax implications

Seller Balance Sheet Buyer Balance Sheet

Assets 1000 Equity 100 Cash 800 Equity 1000
Cash 200 Debt 900 Asset 1000 Debt 900
Capital Gain 100 Goodwill 100

Taxable Capital Gain (art 86 TUIR) Deductible depreciation

Fiscal Value = 100

Acquisition operation is subject to registration fee on the basis of acquired asset type (eg. 3% goodwill, 9% property, etc.)

54
M&A transactions
Contribution
The contribution consists of a transfer of a company or a line of business to another company receiving as
offset stocks of this last

Company A Company B

Company A

[…]%

Company B

 Art. 2342, 2343, 2440 Italian Civil Code: S.p.A.

Legislation  Art. 2464, 2465 Italian Civil Code: S.r.l.
 The operation of contribution requires an estimate survey by an accounting expert

55
M&A transactions
Contribution: accounting implications
Accounting implications

Historical values Current values

Substitutive
Neutral regime
regime

Historical values: The conferrer accounts the shares at historical values, writing off assets and liabilities object of contribution
– No capital gain
– No goodwill

Situation Ante contribution Conferrer post contribution Beneficiary post contribution

Assets 100 Equity 100 Shares 100 Equity 100 Assets 100 Equity 100

Notes: assumption that historical values are equal to fiscal values

56
M&A transactions
Contribution: accounting implications
Accounting implications

Current values – Substitute Regime: the conferrer accounts the received shares in exchange for the contribution at the survey
value and writes off all the assets and liabilities object of contribution.
– The capital gain can be submitted to substitute regime.
– The beneficiary accounts the value of contribution dividing it into all the assets and liabilities included goodwill.

Company A ante contribution Company B post contribution Beneficiary post contribution

Assets 100 Equity 100 Shares 150 Equity 100 Assets 100 Equity 150
Capital Gain 43 Goodwill 50
Tax debt 7

Economic Value = 150

Current values – Neutral Regime: the conferrer accounts the shares received in exchange for the contribution at the survey
value and writes off all the assets and liabilities object of contribution. The survey values affects only for accounting and not for
tax purpose. In fact for tax purpose affects only historical values.
– The capital gain accounts only for accounting (Income Statement E20), and it will not be taxed
– In the conferee accounts only historical values affects for tax purpose.

Company A ante contribution Company B post contribution Beneficiary post contribution

Assets 100 Equity 100 Shares 150 Equity 100 Assets 100 Equity 150
Capital Gain 50 Goodwill 50

Economic Value = 150

57
M&A transactions
Contribution: tax implications

Company B post contribution Beneficiary post contribution

Substitutive regime: Shares 150 Equity 100 Assets 100 Equity 150
Capital Gain 43 Goodwill 50
Fiscal value relevant (Tax
Tax debt 7
from 12% to 16%)
Fiscal value 150 Deductible depreciation
Tax relevant

Company B post contribution Beneficiary post contribution

Neutral regime: Shares 150 Equity 100 Assets 100 Equity 150
Fiscal value not relevant Capital Gain 50 Goodwill 50

Fiscal value 100 No fiscal relevance No fiscal relevance

Contribution operation is subject to fixed registration fee of 200€ and fixed mortgage tax of 200€

58
M&A transactions
Merger

Statutory merger Improper merger

 Combination of two or more companies, where

 Two or more companies merge their capital in a
a company incorporates the capital of the
brand new company.
combining companies.

Company A Company B Company A Company B

100% 100% 100% 100%

Company Alfa Company Beta Company Alfa Company Beta

Company A Company B Company A Company B

50% 50% 50% 50%

Company Gamma Company Alfa that

has took over Beta

Situation after merger

Legislation  Art 2501 to 2504 Italian Civil Code

59
 M&A transactions
Merger: accounting implications
Accounting implications

Annulment GAP

Company A
Company
100% Company A
B
Company B

Deficit GAP
A Before merger B Before merger A After merger
Stock in B 100 Equity 100 Assets 50 Equity 50 Assets 50 Equity 100
Annulment GAP 50

It amounts to the positive difference between the value of the share

merged and the value of B equity
Surplus GAP
A Before merger B Before merger A After merger
Stock in B 100 Equity 100 Assets 150 Equity 150 Assets 150 Equity 100
Annulment GAP 50

It amounts to the negative difference between the value of the stock

merged and B equity 60
 M&A transactions
Merger: accounting implications
Accounting implications

SWAP GAP

Company
Company A Company B Company A
B

Deficit GAP
A Before merger B Before merger A After merger
Assets 100 Equity 100 Assets 50 Equity 50 Assets 150 Equity 100
SWAP GAP 50 Stock increase 100

HP: economic value 100 HP: economic value 100 It amounts to the positive difference between the stock increase and
B equity (economic value > historical value)
Surplus GAP

A Before merger B Before merger A After merger

Stock in B 100 Equity 100 Assets 150 Equity 150 Assets 250 Equity 100
Stock increase 100
SWAP GAP 50

HP: economic value 100 HP: economic value 100

It amounts to the negative difference between the stock increase and
B equity (economic value < historical value) 61
M&A transactions
Merger: tax implications

A After merger
Assets 50 Equity 100
Neutral regime: Annulment GAP 50
Fiscal value not relevant

A After merger
Substitutive regime:
Assets 150 Equity 100
Fiscal value relevant (Tax from 12% to 16%)
SWAP GAP 50 Stock increase 100

A After merger
Assets 150 Equity 100
Annulment GAP 50

Attention to Share capital

A After merger Equity
Assets 250 Equity 100 Breakdown Reserves
Stock increase 100
SWAP GAP 50

Merger operation is subject to fixed registration fee of 200€ and fixed mortgage tax of 200€

62
M&A transactions
Spin off

Total spin off Partial spin off

 Corporate divestiture that results in two or more  Corporate divestiture that results in two or more
new/existing companies companies, but the parent company continues its activity

Company A Company A

100% 100%

Company Alfa Company Alfa

BU1 BU2 BU1 BU2

Company A Company A

100% 100% 100% 100%

Company Alfa
Newco 1 – BU1 Newco 2 – BU2 Newco – BU2
BU1

 Art 2506 CC
Legislation

63
M&A transactions
Spin off: accounting implications
Accounting implications

Annulment GAP

Company B Company B BU1

100%
100%
Company A
Company A BU2
BU1 BU2
Deficit GAP
A Company B Beneficiary B After spin off
BU 1 100 Equity 250 Stock in A 400 Equity 400 BU 1 100 Equity 400
BU 2 150 Stock in A 240
Annulment GAP 60
BU1 is the object of the spin off and its real economic value is 160
BU2 real economic value is 240
B after spin off annuls the 40% of the stock in A (the percentage of BU1 The Annulment GAP amounts to the positive difference between the
in the total asset of A) cost of the annulled stock (160) and the book value of the BU1 (100)

Surplus GAP

A Parent B Beneficiary B After spin off

BU 1 200 Equity 250 Stock in A 400 Equity 400 BU 1 200 Equity 400
BU 2 50 Stock in A 240 Annulment GAP 40

BU1 is the object of the spin off and its real economic value is 160
BU2 real economic value is 240
B after spin off annuls the 40% of the stock in A (the percentage of
BU1 in the total asset of A) The Annulment GAP amounts to the negative difference between the cost of
the annulled stock (160) and the book value of the BU1 (200)
64
M&A transactions
Spin off: accounting implications
Accounting implications

SWAP GAP

Shareholder A Shareholder B Shareholder A Shareholder B

Company A
Company B
BU1 BU2
Company A BU2 Company B BU1

Deficit GAP
A Company B Beneficiary B After spin off
BU 1 100 Equity 250 Assets 50 Equity 50 BU 1 100 Equity 50
BU 2 150 Assets 50 Equity Increase 250
SWAP GAP 150
Economic Value of BU1 is 250

The SWAP GAP amounts to the positive difference between the equity
increase of the beneficiary company and the book value of the BU1
Surplus GAP

A Parent B Beneficiary B After spin off

BU 1 100 Equity 250 Assets 50 Equity 50 BU 1 100 Equity 50
BU 2 150 Assets 50 Equity Increase 50
SWAP GAP 50
Economic Value of BU1 is 50

The SWAP GAP amounts to the negative difference between the equity
increase of the beneficiary company and the book value of the BU1 65
M&A transactions
Spin off: tax implications

B After spin off

BU 1 100 Equity 400
Neutral regime: Stock in A 240
Fiscal value not relevant Annulment GAP 60

B After spin off

Substitutive regime: BU 1 100 Equity 50
Fiscal value relevant (Tax from 12% to 16%) Assets 50 Equity Increase 250
SWAP GAP 150

B After spin off

BU 1 200 Equity 400
Stock in A 240 Annulment GAP 40

Attention to Share capital

B After spin off Equity
BU 1 100 Equity 50 Breakdown Reserves
Assets 50 Equity Increase 50
SWAP GAP 50

Spin off operation is subject to fixed registration fee of 200€ and fixed mortgage tax of 200€

66