Explain the steps in constructing merger models

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Merger of companies is a complex and giant task. Depending on companies, it takes months or years to complete the process.

Sometimes the merger of two big companies may take months of time and the merger of two small companies may take years to complete due to their own reasons and regulations.

In simple words, time taken to complete the process will depend on companies and their management.


The steps involved in constructing merger models are explained below −

  • Profiling − Company will do market research and search for possible targets. Companies will go for the suitable merger type and also set their objectives.

  • Identification − After completing research work, the company will select the targets based on objectives set or similar to their objective.

  • Valuation − After identification, the company will go for the targeted company's valuation (cash flows, synergy, customers, PE etc.). There is no particular format for valuation.

  • Estimation − After the valuation, the company will look for an optimal mix. In this, the offered price is determined. The main consideration is that the seller stock issue does not dilute prevailing Earnings per share (EPS).

  • Adjustments − Various items are added in the books of acquirers along with goodwill/reserves. After merger, both assets and liabilities are recorded with their figures.

  • Making projections − Assumptions about revenue growth, variable costs, capital structure, fixed costs, capital expenditure, margins etc. are made by analysts in forecasting. Sometimes all three statements (income statement, cash flow statement and balance sheet) are linked

  • Combination − After merger company's balance sheets need to be merged which require several adjustments in accounting. Synergies play an important role in combining. Key assumptions are goodwill calculations, purchase price allocations, form of cash or shares, synergies calculations etc.

  • Dilution − It determines merger effect on buyers EPS (Earnings per share). If buyer EPS increases the transaction is deemed accretive and when buyer EPS is decreased the transaction is dilutive. Key assumptions are synergies impact, number of new shares issued etc.

Updated on 19-Jul-2021 09:35:00