Merger Model Template
December 4, 2024
What is a Merger Model?
A merger model is a financial tool used to evaluate the potential outcomes of two companies merging or one company acquiring another. It simulates the impact of the transaction on the acquirer’s financial performance. By analyzing the combination of the two entities, the Excel model helps assess how the acquisition will be facilitated and its potential effects on financial metrics such as earnings per share (EPS), debt levels, and synergies. It also allows for sensitivity analysis of the inputs and assumptions.
Merger Model Template – Key Inputs
Download the bespoke Financial Edge Merger Analysis template. This Excel model is designed to provide an easy structure to analyze mergers and their impact on funding, synergies, and profitability post-deal.
1. M&A Model Inputs
The first step in building a merger model involves gathering key inputs that will drive the rest of the analysis. For listed companies, this information should be available in the latest company report or quarterly/annual filing. For private companies, it may require more due diligence to get the details required:
- Valuation Inputs: this includes the latest share prices of the target and acquirer companies, basic shares outstanding, potentially dilutive securities, net debt, and other adjustments to enterprise value (EV) like pension deficits.
- Financial Statement Inputs: essential financial data is taken from the income statements and balance sheets of both companies – this includes metrics such as EBITDA, EBIT, EPS, and balance sheet items like debt and assets.
2. M&A Model Assumptions
To start the analysis, several key assumptions must be made:
- Acquisition/Control Premium: this premium, typically ranging from 20% to 40%, is added to the target company’s share price to determine the acquisition price per share.
- Financing Mix: decide on how the acquisition will be funded—whether through cash (via debt) or equity.
- Cost of Financing: compare the cost of debt versus the cost of equity based on forecast cash flows.
- Debt Raising Capability: evaluate the acquirer’s ability to raise debt and the potential impact on credit ratings.
- Impact of Equity Financing: assess the effect on post-deal earnings and ownership.
- Transaction Fees: consider advisory fees, debt issuance fees, and equity issuance fees that will need to be covered.
- Synergies: estimate potential cost reductions and other synergies that could result from the merger
- Interest Assumptions: calculate the interest expenses for new acquisition debt and interest income on cash
Steps for Using the Merger Model Template
Using the Excel model we can create a merger scenario and analyze the cost and benefits of such a deal.
- Start with Key Inputs: gather data on share prices, shares outstanding, net debt, and financial statements for both companies
- Make Assumptions: determine the acquisition premium, financing mix, costs, and potential synergies
3. Model Analysis:
- Calculate the acquisition value and associated costs, including fees
- Determine sources and uses of funds
- Prepare a consolidated balance sheet, income statement, and cash flow statement
-
- This template is an abridged version and explores the EPS impact
- Ensure that pro forma shares outstanding reflect the new shares issued
- Model Outputs:
- Calculate EPS accretion or dilution
- Assess the impact on credit ratings, ownership dilution, and other financial metrics
- Evaluate synergies and the overall value creation or destruction
What You’ll Get with the Merger Model Template
Using a merger model template allows you to:
- Explore different scenarios for a potential deal, such as varying the purchase price or choosing the best financing option.
- Calculate key metrics such as EPS accretion/dilution, market cap, and acquisition equity value.
- Analyze the potential impact on credit ratings, ownership, and financial performance.
- Gain insights into the strategic benefits or risks of the merger, including the value of synergies and the overall deal viability.
This structured approach provides a comprehensive view of how two companies might integrate, helping stakeholders make informed decisions about the merger or acquisition.
Conclusion
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 the acquirer and acquiree’s future performance. Having the tools to provide accurate and time-sensitive deal analysis is invaluable in the M&A universe.
To learn more about M&A as well as gaining skills in accounting and financial modeling with our Investment Banking Certification.