The merger agreement also specifies the conversion mechanism. The merger proxy clearly lays out how options and restricted stock holders will be affected. In a transaction, several things can happen to stock options and restricted stock. Commonly, an earn-out payment will be contingent upon the target hitting EBITDA and revenue goals, or specific milestones, such as a pharma target securing FDA approval of a drug. One way to bridge the valuation gap between what a target thinks it’s worth and what a buyer is willing to pay is to structure contingent consideration (called an “earn-out”).
A merger is the “combination” of two companies, under a mutual agreement, to form a consolidated entity. In closing, the implied accretion / (dilution) is 6.4%, which was derived by dividing the pro forma EPS by the pre-deal EPS of the acquirer and then subtracting 1. EBT can be calculated by dividing the company’s net income by one minus the tax rate, which we’ll assume to be 20.0%. In the final part of our exercise, we’ll start by calculating each company’s net income and earnings before taxes (EBT) on a standalone basis. Since future cash taxes will exceed the book taxes shown on the financial statements, a DTL is recorded on the balance sheet to offset the temporary tax discrepancy that will gradually decline to zero. With the cash consideration section complete, we’ll move to the stock consideration side of the deal structure.
Purchase Price True-Up
- In order to forecast, an analyst will make assumptions about revenue growth, margins, fixed costs, variable costs, capital structure, capital expenditures, and all other accounts on the company’s financial statements.
- It’s about piecing together a financial story that makes sense for both companies involved.
- Building a merger model requires combining technical financial modeling skills with strategic understanding of deal dynamics.
- The types of M&A transactions and how they affect the financial reporting and disclosure requirements.
- Analysts often break down synergies into categories like operational efficiencies, procurement savings, and increased sales opportunities.
- Following these steps, you’ll build a dynamic Merger and Acquisition Model ready for real-world valuation, transaction planning, and investment analysis.
- For transactions in which the acquirer issues more than 20% of its own stock, acquirer shareholders may also be required to approve the acquisition.
Because LinkedIn must get shareholder approval for this transaction, it must file a proxy statement with the SEC. The press release merger model announcing the deal is usually distributed to media outlets and is on both companies’ websites. In the Microsoft-LinkedIn deal, Microsoft used its cash to acquire LinkedIn stock.
As we will see shortly, he committed to voting for the deal ahead of the announcement, so the vote was a foregone conclusion. According to Bloomberg, most (83%) of global M&A deals in 2016 had premiums between 10-50%, putting LinkedIn in the high end. Acquirers always have to pay more than the seller’s trading price. However, buyers can also pay with their own stock, cash, or a mixture. This is how we learned of the LinkedIn acquisition on June 13, 2016 When M&A is unsuccessful, it can destroy value and especially hurt the buyer (since the seller is already cashed out).
This accounting treatment is required under acquisition accounting (ASC 805). When an acquirer pays more than the fair value of net identifiable assets, the excess is recorded as goodwill on the combined balance sheet. These financing costs reduce pro forma earnings and must be incorporated into accretion/dilution analysis. Calculate interest expense as new debt multiplied by the cost of debt. Financing fees on new debt issuance are capitalized and amortized over the debt term. Transaction fees typically run 1-3% of deal value for advisory fees plus legal and accounting costs.
Leveraging Pricing and Willingness-to-Pay Insights in Mergers & Acquisitions
2) Estimate the Purchase Price and Form of Payment – You assume a share-price premium for a public Seller and confirm the price with the valuation methodologies; for private Sellers, the purchase price is based on a valuation multiple. You’ll learn how to combine the Income Statements and calculate EPS accretion/dilution in this lesson, including support for “switches” on the revenue and expense synergies and more flexible formulas for the debt repayment and new depreciation and amortization lines. Each step involves judgment calls about assumptions that significantly impact results. These tables help clients and deal teams understand the range of potential outcomes and make informed decisions about transaction structure. A deal that is 5% dilutive before synergies might become 3% accretive with $50 million in annual cost synergies. Models typically give full credit to cost synergies while applying haircuts to revenue synergy assumptions.
They help in understanding how the new entity will perform financially. Financial projections are like a crystal ball for the future of the merged companies. As you embark on your journey into this field, remember that every deal is unique, and adaptability is key. From a strategic standpoint, M&A activities can reshape industries, create synergies, and unlock substantial value. Conclusion and Next Steps Accurate forecasts critical to avoid flawed valuations and ensure merger success.
Offer Price Per Share Calculation
In the example given below, we understand how to arrive at the acquisition enterprise value. A calculation to gauge the potential goodwill created (or lost) is a factor to consider with the deal valuation. Having stated the above, it might be noted that synergy expectations should always be considered when assessing a deal, as it can significantly influence post-deal value creation. We at Exitwise can help you hire and manage an industry-specific M&A team to help you create an M&A model to simulate the buyer’s.
Valuation – Insurance-Specific
Each department brings a piece of the puzzle, and without their insights, your model might miss something crucial. Make sure your data is up-to-date and thoroughly checked before you start building models. When stakeholders know that the data is reliable, it makes it easier for them to back the merger confidently. Transparency builds trust, and trust is essential for any successful merger. Remember, the goal is to make the audience see the vision behind the merger, not just the balance sheets.
Then, specify the proportion financed through debt, also known as the leverage ratio, and forecast debt repayments over time. Start by estimating the total capital needed to complete the transaction. Use a similar approach to forecast central cost synergies — such as savings in rent, IT systems, legal fees, or management overhead. Then, show which roles are retained, merged, or eliminated, and calculate the resulting cost savings using average salary assumptions.
- In this section, we will discuss how to conduct a post-merger evaluation and performance analysis in financial modeling, and what are the main factors and metrics to consider.
- The transaction fees – i.e. the expenses related to M&A advisory to investment banks and lawyers – are assumed to be 2.5% of the offer value, which comes out to be $100 million.
- Often with financial institutions, you link key model assumptions to these regulatory capital requirements and assume a certain targeted level to avoid unrealistic assumptions.
- As we’ll see, a bidding war benefited the lucky shareholders at LinkedIn (and Microsoft’s $196 price wasn’t even the highest offer!).
- You tell us about your business’s history, management team, and financial performance.
- Method — 50% cash and 50% stock (using Company A’s stock price of $20 per share)
This team typically comprises individuals from both the acquiring and target companies who possess the necessary expertise and knowledge about their respective organizations. Integration planning should begin with a clear understanding of the objectives behind the merger or acquisition. Integration planning and execution play a crucial role in ensuring the success of the merger or acquisition, as they involve combining the operations, systems, cultures, and strategies of the involved entities.
Understanding Goodwill
At its core, a merger model evaluates the financial impact of a merger or acquisition. A merger model is a financial tool used to evaluate the potential outcomes of two companies merging or one company acquiring another. A merger model is primarily used to evaluate the financial impact of a merger or acquisition.
Analyze how the merger or acquisition could impact overall income by forecasting potential revenue synergies. Gain practical experience building a merger model following instructor-led videos with our mergers and acquisitions course. M&A models should also assess the potential impact on credit ratings, ownership dilution, consideration components, combination dividends, transaction ROIC vs WACC analysis, and premium paid versus present value of synergies. The model helps understand how an acquisition would be facilitated and assesses the impact on the acquirer’s financials. A merger model can be helpful for both you and the buyer when negotiating a potential transaction because it can help you agree sooner. Determining the accretion or dilution of the acquirer’s earnings per share involves combining the net incomes of the two companies and dividing the new shares outstanding.
Let’s explore the merger model example through an accretion/dilution analysis to understand how the transaction impacts the EPS of the acquiring company. The primary purpose of the merger model is to determine if the transaction will be financially beneficial for the acquiring company and its shareholders. In this guide, we’ll explore how a merger model determines the deal’s effect on the earnings per share of the consolidated entity and how this can impact your M&A transaction. The whole purpose of a merger model is to show clients the impact of an acquisition to the acquirer’s EPS and how the new EPS compares with the status quo.