Note that by the time this book is published more recent documents will certainly be available. For purposes of following the analysis in this book, I recommend digging up the documents described here. You can later update your model with more recent information once you have established the core modeling and analysis skills learned in this book.

      Finally, other information sources, such as news releases or research reports, are good resources that may contain financial information on a merger. For now let's utilize just the information found in the S-4 report.

      At the top of page 2 of the S-4 document, the title “JOINT PROXY STATEMENT/PROSPECTUS PROPOSED MERGER – YOUR VOTE IS IMPORTANT” indicates the document's purpose. This is a document soliciting shareholders to vote and approve the transaction. It is in this document where they explain the transaction in some detail, and so we will use this document to further analyze the transaction. Let's look at the first paragraph of page 2:

      Here it is clearly stated in the first sentence that this is a merger. Office Depot and OfficeMax are two very large entities of similar size, combining to form one entity. The mechanics behind how this is done will be laid out in Part Three.

      Is this transaction horizontal or vertical? Although such transactions can be a gray area in that there are likely elements of both, this would clearly lean toward a horizontal transaction. OfficeMax and Office Depot are not only both in the same industry but also clear competitors of each other, and so such a consolidation would increase their market share in this industry.

      So from a subjective level this chapter should at least give you the very basic definitions relating to the M&A framework and process. Again I kept this brief as the true purpose of this book is to give a mechanical and technical understanding of the M&A process. The mechanics of M&A can be quite complex, so Part Two attempts to provide instruction on core transaction mechanics that we can use to piece together and form a large consolidation in Part Three. Before doing so, the next chapter will provide a refresher on financial statements as preparation.

      Chapter 2

      Financial Statements Refresher

      Before getting into M&A analysis, it is important to give a brief overview of the six major statements in a standard financial operating model and how they work together:

      1. Income statement

      2. Cash flow statement

      3. Balance sheet

      4. Depreciation schedule

      5. Working capital schedule

      6. Debt schedule

      The general concepts in this chapter are necessary to understand the merger processes in the subsequent chapters.

      The Income Statement

      The income statement measures a company's profit (or loss) over a specific period of time. A business is generally required to report and record the sales it generates for tax purposes. And, of course, taxes on sales made can be reduced by the expenses incurred while generating those sales. Although there are specific rules that govern when and how those expense reductions can be utilized, there is still a general concept:

      A company is taxed on profit. So:

      However, income statements have grown to be quite complex. The multifaceted categories of expenses can vary from company to company. As analysts, we need to identify major categories within the income statement in order to facilitate proper analysis. For this reason, one should always categorize income statement line items into nine major categories:

      1. Revenue (sales)

      2. Cost of goods sold (COGS)

      3. Operating expenses

      4. Other income

      5. Depreciation and amortization

      6. Interest

      7. Taxes

      8. Nonrecurring

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