What is the merger model and the factors considered?

Merger model gives a detailed analysis of possible combinations of companies. Merger model acts as an intensive tool and is used by banks and merger and acquisitions professionals.

It is a feasibility study carried before amalgamations. Companies hire investment and valuation professionals to estimate the value. Based on the value, companies make decisions whether to go forward or not.


The factors considered in merger model are as follows −

  • Purchase considerations
    The main thing to keep in mind is, whether there is an increase in Earnings per share (EPS) or decrease in EPS. Companies must take care that the process does not lead to increased debt (it can sustain) and increase in liquidity. An ideal combination is to mix cash, debt and stock to its long term goals.

  • Intangibles
    In many cases, purchase considerations will not match with company worth, because of fair value (considered more or less). Sometimes, acquiring companies agree to pay a premium amount due to high synergy benefits. If a company is under performing, it may sell below its fair value. This gives an increase in intangible values in the balance sheet.
    C>AVn = G
    C<AVn= CRa
    Here C = considerations, AVn = Net asset value, G = Goodwill, CRa = adjustments to capital reserves.

  • Synergies
    Synergies means the unusual benefit results help the company to stay ahead in market/competitors.

  • These are divided into vertical and horizontal. 

  • Vertical − This type of merger brings cost efficiency and self-reliance to the company. Generally, companies with the same product line will go for vertical merger.

  • Horizontal − This type of merger will eliminate competition in the market by merging with other industries.

Updated on: 13-May-2022


Kickstart Your Career

Get certified by completing the course

Get Started