A merger is when two or more companies combine to increase value and enhance operations. This is a pre-agreed action and is not seen as hostile. A merger should always provide increased benefits and Earnings Per Share for shareholders in both companies, or else it is unlikely to be worth doing.

The process for a merger model is as follows:

  • Calculate Purchase Price - this can be done using precedent transactions, public comparable companies and a DCF valuation.
  • Determine Financing Method - calculate the percentage of the deal which will be financed by debt, equity and stock.
  • Project & Combine Financial Profiles - the Income Statement, Balance Sheet and Cash Flow Statement of both the buyer and seller must be combined and adjusted for acquisition effects.
  • Calculate Accretion & Dilution - work out the change in EPS and create sensitivity tables to model different scenarios.

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