Week 9: Compilation

We are nearing the end of the project, and my work on the development of the model and its results are nearly complete. Thus, this week I began compiling my efforts and began preparing for the presentation. With minimal addition to the content of the project, I will take this week’s blog as an opportunity to overview the LBO process, now having nearly finished the process. 

Here’s an overview of the steps needed to create and assess an LBO model:

1. Gather Information: Collect detailed information about the target company, including its financial statements, historical performance, market outlook, and any other relevant data.
2. Build Assumptions: Make assumptions about key variables such as revenue growth, expenses, capital expenditures, working capital changes, and tax rates. These assumptions will drive the financial projections for the target company.
3. Create Projections: Develop a set of projected financial statements for the target company, including income statement, balance sheet, and cash flow statement. These projections should typically cover a period of 5 to 7 years, reflecting the expected holding period of the investment.
4. Determine Purchase Price: Calculate the purchase price of the target company based on factors such as its current market value, potential synergies, and the desired rate of return for investors.
5. Structure Financing: Determine the optimal mix of debt and equity financing for the acquisition. This involves deciding how much debt can be used to finance the purchase while still maintaining an acceptable level of risk.
6. Model Debt Repayment: Project the repayment schedule for the debt used to finance the acquisition. This will typically include both principal repayments and interest payments.
7. Estimate Returns: Calculate the expected returns for investors based on the projected cash flows from the target company, the financing structure, and the exit strategy. Common metrics used to evaluate LBO returns include Internal Rate of Return (IRR), Return on Investment (ROI), and Equity Multiple.
8. Perform Sensitivity Analysis: Assess the sensitivity of the LBO model to changes in key assumptions such as revenue growth rates, discount rates, and exit multiples. This helps to understand the range of possible outcomes and the associated risks.

Hope this can clarify once again how I have attempted to assess this financial scenario between Arcus and Gilead and perhaps shine a new light, now as I have completed most of the brunt work. See you guys next week.