How to Build a Merger Model Financial Edge

We do this because if Debt is used to fund the deal, it’s helpful to track required principal repayments to determine how that New Debt balance changes over time (since it will affect the Interest Expense as well). Those represent Cost Synergies, or cost savings from firing employees and consolidating buildings, so we also added Revenue Synergies in our version of this model. This differs from the real deal, which was financed with 100% Stock, because we want to illustrate all the potential acquisition effects on the Combined Income Statement. 4) Combine the Balance Sheets of the Buyer and Seller (OPTIONAL) – It helps to create a Combined Balance Sheet because it lets you assess the Combined Company’s capital structure and whether or not it has reasonable levels of Debt, Equity, and Cash. However, it’s not required to calculate EPS accretion/dilution or analyze the deal in other ways. As you see in the example above, this deal is dilutive for the acquirer, meaning their Earnings Per Share is lower, as a result of doing the transaction, than their Earnings Per Share were before the deal.

Accretion & Dilution Analysis

AVP tables show how premiums at different levels translate into the EV acquisition multiple, usually compared to precedent transactions and trading comparables. Once the forecast is complete, then it’s time to perform a valuation of each business. The valuation will be a discounted cash flow (DCF) model that is also compared and contrasted against comparable company analysis and precedent transactions. It should also be noted that the fact that the EU has adopted a fully-fledged regulatory framework constraining the behaviour of digital gatekeepers, the DMA, does not reduce the need to scrutinise mergers for potential anti-competitive effects.

• As well as modules on M&A cash deals, earnouts, LBO and acquisition finance debt capacity.
• Before Collins arrived at Forseven in January 2024, design models and feasibility studies for models had been created but “we have evolved a long way since then”.
• CFI is the global institution behind the financial modeling and valuation analyst FMVA® Designation.
• Careful analysis will have taken place prior to any deal to ensure that it is beneficial before undertaking it.
• The debt repayment tracking in an LBO makes the calculations more complex than in an M&A model, even if the latter includes debt financing.

Companies are similarly sized – stock might always be necessary because cash/debt are implausible (mergers of equals). Key Excel functions include SUM, IF, INDEX-MATCH, and LOOKUP to automate calculations and ensure accuracy in linking data between financial statements. A “merger” means the companies are similarly sized, and the deal may be 100% Stock or have a high Stock component; in an acquisition, one company is substantially bigger than the other. Merger Models are used to analyze the effects of a merger or acquisition in which one company acquires another company.

Merger Model

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Video Tutorial: Purchase Price Allocation Example and Walkthrough

Since our focus in this section is on modeling, we will not necessarily cover the accounting rules and regulations, and theories governing each topic. For most topics, you can find more detailed background information elsewhere on this website. Each funding source has a different “cost,” so from a financial perspective, acquirers want to use the lowest-cost funding source (Cash) as much as possible. If the objective is to optimize consumer welfare, Williamson suggests that the law should only allow a merger if it can result in efficiencies that do not increase the price. The debt repayment tracking in an LBO makes the calculations more complex than in an M&A model, even if the latter includes debt financing. If the EPS is lower after you’ve combined the two companies’ EPS, the EPS is dilutive (decreasing value).

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A merger model is a vital tool when it comes to evaluating whether a potential deal will be value accretive or not. Careful analysis will have taken place prior to any deal to ensure that it is beneficial before undertaking it. Similarly, the Financial Edge merger model template can be used after a deal has been announced to calculate the deal price and potential impact on merger model the acquirer and acquiree’s future performance.

Reaching a mutually acceptable consideration is vital for finalizing the deal. These are assumptions about the overall economic impact, industry-specific trends, and competitive landscape. This includes interest rates, inflation rates, and market growth rates, which affect both the cost of capital and potential growth opportunities.

This assumption involves predicting how the combined company’s revenue will grow over time. It often takes into account historical growth rates, market trends, and the potential for new market expansion. Reliable models are crucial for conducting a thorough risk assessment, identifying rewards, determining the feasibility of achieving projected synergies, and ultimately deciding whether to proceed with the merger or acquisition. It involves identifying financial synergy that arises from the merger, such as cost savings or increased revenue that would not be achievable independently.

These metrics current insights into the fair value of the corporations involved. The EPS is accretive (increasing value) when the combined EPS is greater than the buyer’s standalone EPS before you close the deal. You might also look at the Contribution Analysis, the Value Creation Analysis, or a simple DCF-based valuation of the Seller to judge the quantitative merits of the deal. To illustrate step 6 – the Income Statement Combination – we’ll use Builders FirstSource’s $2.5 billion acquisition of BMC Stock Holdings as the example deal. As you can see, not all of these steps are required; steps 4 and 5 are optional, and even steps 7 and 8 could be optional if you’re pressed for time, or you lack the required information. Gain unlimited access to more than 250 productivity Templates, CFI’s full course catalog and accredited Certification Programs, hundreds of resources, expert reviews and support, the chance to work with real-world finance and research tools, and more.

Important terms to note in the concept of a merger model are the ‘Acquirer’ and the ‘Target’. The Acquirer is the corporation that intends to purchase another company, while the Target is the company being purchased. When you work with us at Exitwise, we can ensure the M&A experts you work with help you properly conduct purchase price allocation and accounting to optimize your take-home amount.

• His nine-year career at JLR culminated with the job of executive director for vehicle programmes.
• The resources, actions and change communication can be targeted based on the obtained information to where the support is needed.
• In 2021, the Commission published guidance on the interpretation of EUMR Art. 22 (European Commission, 2021).

Sign up to access your free download and get new article notifications, exclusive offers and more. We prefer to start the Combined Income Statement with the bottom of the Combined Cash Flow Statement, or the “Combined Cash Flow Projections” if you lack full Cash Flow Statement for both companies. These might come from the fact that both companies can expand geographically and sell to different customers in different regions once the deal is done.

Deciding whether it’s going to be a cash deal, an equity deal or some combination of the two is the first step in creating an M&A model. A lot of that decision depends on the valuation of both the acquiring company and the target company. Depending on how these companies are valued at the time of the transaction, it may be more advantageous to go for an equity stake, rather than for cash or vice versa. Dive deep into the intricacies of business studies as you learn how to build a merger model. This key tool in the world of finance and acquisitions can be an indispensable skill, offering valuable insights into potential business mergers.

Depending on complexity, a basic merger model can be built in a few hours, while more detailed models incorporating sensitivity analysis and multiple financing scenarios may take several days. With tools like DocuBridge, you can build a complicated merger model in less than 10 minutes. Below some spreadsheets, we provide Excel tips and keyboard shortcuts/keystrokes that highlight best practices for financial modeling or provide instruction on how to perform specific tasks within Excel. Establish data-sharing agreements with the target company to ensure transparency and access to accurate information. This includes the structure of the deal (cash, stock, or a combination), the interest rate on any debt used to finance the acquisition, and the terms of equity issuance. Revenue synergies refer to the increased revenue potential from the merger, such as cross-selling opportunities, new customer acquisition, and expanded market reach.

As part of this acquisition, both xAI and X must navigate the intricate landscape of regulations and public sentiment regarding their practices, ensuring that they maintain transparency with users. The rebranding of Twitter to X is emblematic of Musk’s broader ambitions to redefine the platform’s identity. The transition marks a departure from the traditional social media framework towards a multi-faceted platform that aims to incorporate various services, from financial transactions to artificial intelligence interactions.

His nine-year career at JLR culminated with the job of executive director for vehicle programmes. CYVN acquired McLaren Automotive in December 2024, and it was Collins, who also acts as an automotive advisor to CYVN, who around a year ago first suggested it looked at the Woking-based supercar maker to help realise Forseven’s ambitions. The merger was always the intention, and has been formally in the works since then. It formed Forseven as an anchor investment in 2022, and has expanded its automotive portfolio since then. It paid $2.2 billion (£1.7bn) for a 20% stake in Chinese company Nio in late 2023, and Collins sits on the Nio board as part of its stake holding. “Whether it’s a direct or indirect relationship, technology plays a role,” he said.