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 , public comparable companies and a 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.