Domain: Finance
Question:
BlackRock has reported strong FY2024 results in its 10-K, with $18.0B in revenue, an operating margin of 43%, a net income of $7.5B, $9.8B in cash, $6.0B of debt, and a stated ROIC hurdle of 12% against an estimated WACC of 8%. The firm is evaluating the $12.0B acquisition of “Target Asset Manager,” a $2.0B revenue business growing 5% annually with EBITDA margins expanding from 35% in Year 1 to 37% in Year 3. The target’s capex is projected at $200M in Year 1 and $100M thereafter, depreciation is 2% of revenue, the tax rate is 25%, and working capital is assumed at 10% of revenue with annual changes reflected as cash inflows or outflows. Integration costs are expected to be $150M upfront in Year 1 (treated as an expense), while identified synergies include $250M of cost savings in Year 2 and $400M in Year 3. The deal would be funded 50% with cash and 50% with new debt at a 6% interest rate, with 150M BlackRock shares outstanding. For comparables, peer EV/EBITDA multiples include 14x for passive/ETF-heavy managers, 12x for alternative managers, and 10x for traditional managers, with weights of 40%, 40%, and 20% respectively.

Tasks:

1. Compute the weighted EV/EBITDA multiple and derive an implied valuation for the target using comps.
2. Build a three-year free cash flow model for the target, explicitly including integration costs and changes in working capital. Discount those flows to a DCF-based enterprise value, both stand-alone and including synergies.
3. Incorporate the proposed financing structure to assess EPS accretion or dilution in Year 2.
4. Compare the target’s ROIC to BlackRock’s 12% hurdle, calculate EVA as (ROIC – WACC) × invested capital, and evaluate whether the acquisition creates value.
5. Provide a final recommendation on whether BlackRock should proceed with the $12.0B purchase price, highlighting critical assumptions and risks.

Expected points in a correct answer:
Calculates the total weighted multiple as 12.4x.
Calculates the target's Year 1 EBITDA as $700M.
Calculates the Implied EV from comps as $8.68B.
Concludes that compared to the $12B ask, comps suggest the target looks overpriced.
Calculates Year 1 stand-alone NOPAT as $495M.
Calculates Year 2 stand-alone NOPAT as $535M.
Calculates Year 3 stand-alone NOPAT as $579M.
Calculates Year 1 stand-alone FCF as –$15M.
Calculates Year 2 stand-alone FCF as $467M.
Calculates Year 3 stand-alone FCF as $513M.
Calculates the stand-alone Terminal Value as $9,560M.
Calculates the stand-alone Enterprise Value from the DCF as $8.39B.
Calculates the Year 2 FCF with synergies as $655M.
Calculates the Year 3 FCF with synergies as $812.5M.
Calculates the Terminal Value with synergies as $15,142M.
Calculates the Enterprise Value with synergies as $13.21B.
Calculates the after-tax interest expense as ($277) million.
Calculates the incremental net income contribution in Year 2 as $446 million.
Calculates the Combined Net Income as $7,946M.
Calculates the Pro Forma EPS as $52.97.
Calculates the Pre-deal EPS as $50.00.
Calculates the EPS Accretion as +6% (allow +/- 0.5%).
Identifies the Invested capital for the ROIC calculation as $12B.
Calculates the Year 2 ROIC with synergies as 6.0%, using after-tax EBIT ÷ invested capital ($723M ÷ $12B) (allow +/- 0.5%).
Calculates the Year 3 ROIC with synergies as 6.7%, using after-tax EBIT ÷ invested capital ($804M ÷ $12B) (allow +/- 0.5%).
Concludes that ROIC is below BlackRock's 12% hurdle.
Calculates the Year 2 EVA as –$240M.
Calculates the Year 3 EVA as –$156M.
Concludes that both years are value destructive.
States the DCF stand-alone value = $8.4B.
States the DCF value with synergies = $13.2B.
Final recommendation explicitly balances EPS accretion (+6%) against valuation gap and ROIC/EVA shortfall. Must conclude: while EPS is accretive, the deal looks expensive relative to comps and destroys value on a ROIC/EVA basis. Proceed only if synergies are highly certain, integration is well managed, and leverage discipline is maintained.