Why are Merger Models built?

Most “merger” models are built to analyze the impact of an acquirer buying a target company. Sometimes the model evaluates one specific target and sometimes it can evaluate different possible targets. But the financial and accounting ideas are the same. 

This includes both:

• Valuation impact:  What price should the buyer consider paying and what will this do to its own value?
• Financial impact: What is the impact on the buyer’s income statement (often measured by accretion / dilution in Earnings Per Share (EPS) when the buyer is a public company) and credit profile?

Models can also be built to look at the impact to a company selling an asset or business (i.e. a divestiture model), but this is a little less common.

Components of a Merger Model:

A typical merger or acquisition model might have the following components:

Assumptions:

• Buyer and target financials 
• Synergy assumptions
• Purchase price and financing assumptions 

Transaction Calculations:

• Purchase price allocation and goodwill
• Sources and uses of funds 
• Closing balance sheet 

Modeling:

• Schedules for financial statement line items
• Pro Forma buyer financial forecasts
• Valuation of stand-alone and combined companies

Output & Senstivities:

• Income statement impact 
• Credit analysis
• Valuation and shareholdings analysis

Types of Merger Models:

Simple Model:

When used:

• Preliminary evaluation
• Need to quickly switch between target companies and compare results 

Atrributes:

• Uses summary financials (or EPS for a public deal) 
• Simplified transaction assumptions such as blended new debt
• Short forecast horizon (1-2 years)

Full Combination Model:

When used:

• Live negotiation/transaction
• Approvals for deal financing

Atrributes:

• Full financial statements
• Detailed assumptions
• Longer forecasts (5+ Years) 
• Valuation support