Merger of Equal Modeling

Does anyone have experience in merger of equals modeling? I understand that you add up each line item on the IS and BS. Is that all there is to it.

Company A has an EBITDA of $10mm
Company B has an EBITDA of $5mm

Selling price is at 6.0x.

Does Company B, which is a public company need to raise equity to have the same valuation.

Please help me with the mechanics.

Thanks

 
Best Response

Well I am assuming you are just talking about regular M&A modeling .... depends on what your sources and uses are:

Typcial sources of funds are cash on hand, target cash, new debt and issuing equity. Typical uses are purchase target equity, retire debt and fees. MOE modeling usually assumes that the buyer will pay for the other company almost all in stock (or at least the pitches / deals i have worked on).

You have to adjust the balance sheet for purchase price accounting. You have to adjust the Income statement for interest expense, tax adjustments and synergies. EBITDA would be important if you are making leverage assumptions.

If both companies have the same EBITDA multiple than company B is worth half (assuming no cash/debt) than company A. Hope that was somewhat helpful. Not sure exactly what you are asking.

 

Can you be more specific?

I cannot think of anything offhand. Usually the math gets tricky with acquisitions of larger companies (comparatively) because you usually have a mix of consideration instead of an all-cash purchase. In an all-cash, you just have to account for additional interest expense on the debt you issue above balance sheet cash. Once you have equity consideration, you get into exchange ratios, collars, etc. in addition to additional debt and how it effects accretion/dilution. In both cases, you also have to figure in asset write-ups for pro forma PPE and depreciation.

 

I would suggest going through the merger model on macabacus.com if you haven't already. It's very detailed.

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Malakari:

Question, how are you in PE and don't know how to do a (rather basic) merger model? No offense intended.

Valid question. I know how to run a model; the thread title is a misnomer. I've never modeled a merger between two similarly-sized companies before so I didn't know if there was anything different than modeling out an add-on acquisition that I had to keep in mind, in terms of combining the company financials and making adjustments.

Also, my post history will confirm this, but I got into PE by basically having one of the partners (now my boss) do me a favor and bring me on to learn. I already knew how to run the models but didn't have any prior professional deal experience.

 

Well you guys are correct in the end, but the logic is incorrect. The fact that A loses its name results in B being the buyer. The reason is that legally, in a merger, there is only one surviving entity. Usually the entity that pursues the txn and would be considered the buyer is the one that keeps the name/copyrights in the survival.

Just because B is a bigger company or something does not mean it is the buyer. There have been multiple times in the past where a buyer who was smaller than a target merged successfully.

 

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