Mergers & Acquisitions Financial Modelling for Successful Outcome

At Anup N. Amatya & Associates – professional Financial, Business & Management Consultants, we advise our clients to determine profitable Mergers & Acquisitions Financial Modelling solutions.    

Mergers & Acquisitions Financial Modelling Terms

Merger describes the joining together of two or more entities. If one entity acquires a majority shareholding in another, the second entity is practically acquired by the first. If the two entities join together to combine their separate identities into a new firm, then the process is identified as a merger. 

General Terms

• Acquirer: The firm which is purchasing a company in the acquisition (the buyer).

• Target: The firm that is acquired by the buyer is Target.

• Merger: The purchasing company acquires all of the target company shares/assets, and the target company ceases to exist.

• Acquisition: The purchasing company acquires more than 50% of the shares of the acquired company, and both companies survive, remain in existence. 

• Asset Deal: The acquirer purchases only the assets of the target company (not the shares).

• Share/Stock Deal: The acquirer purchases the shares of the target company.

• Transaction Close Date: The date on which the transaction expects official completion.

• Restructuring Charges: These are fees or charges relating to early debt repayments and are part of a restructuring.

• Equity Issuance Fees:  These are underwriting fees charged by investment banks to issue equity in connection with the transaction.

• Debt Issuance Fees:  These are underwriting fees charged by investment banks to issue debt in connection with the transaction.

• Other Closing Costs: May include due diligence fees, legal fees, accounting fees, etc. related to the deal.

• Fully Diluted Shares Outstanding: The number of shares a company has outstanding after options, convertible securities, etc. are exercised.

• Pro Forma Shares Outstanding: The number of shares outstanding after the transaction closure and issuance of additional equity.

• Share Issuance Discount: Any discount (if any) to the current market price to determine the number of shares the target company receives.

• Synergies: Cost savings and revenue enhancements expected in connection with a merger/acquisition.

• Revenue Enhancements: Increases in revenue expected due to cross-selling, up-selling, pricing changes, etc.

• Takeover Premium: The percentage above the target’s current share price the offer price represents.

• Offer Price: The price offered per share by the acquirer.

• Cash Consideration: The portion of the purchase price given to the target in the form of cash.

• Stock Consideration: The portion of the purchase price given to the target in the form of shares of the acquirer stock.

• Share Exchange Ratio: The offer price for the target shares divided by the acquirer share price.

• Identifiable Assets: These are assets that can be assigned a fair value and can include both tangible and intangible assets.

• Net Book Value of Assets: It is the book value of assets minus book value of liabilities.

• Excess Purchase Price: The value of the purchase price over and above the net book value of assets. 

• Fair Value Adjustments: The increase or decrease in the net book value of assets to arrive at the fair market value.

• Goodwill: The excess purchase price over and above the target’s net identifiable assets (after fair value adjustments).

• Accretion: It is an improvement in per-share price post transaction (after issuing additional shares).

• Dilution: A worsening of per-share price post transaction (after issuing additional shares).

• Intrinsic Value: It is the estimated value of the business using discounted cash flow analysis. 

• Sensitivity Analysis: It is a method of testing how sensitive outputs in the model are to changes in certain assumptions.

Mergers & Acquisitions Example

Online Co. Inc., Salient Features:

• The Acquirer
• Seeking a multi-channel strategy
• Wants physical locations in major cities
• Does not have the expertise to open retail locations
• Has identified the best option target company
• Seeking a friendly acquisition of a Brick & Mortar Co. 
• Sees synergies in Increased Revenue (through cross-selling, new brands, etc.) as well as Cost Savings (through inventory management, manufacturing, overhead, etc.)

Brick & Mortar Co., Salient Features:

• The Target
• Does not have a noteworthy online presence
• Has developed very high-performing retail locations with strong organic growth
• Has a proven track record of opening stores in new locations (Capital Growth)
• The management team is amenable to the acquisition 

Strategic vs Financial Buyers

Strategic Buyers

• Seek Horizontal or Vertical expansions
• Interested in identifying and delivering operating synergies such as Hard Synergies & Soft Synergies.

Financial Buyers

• Private Equity firms
• Leveraged buying for maximum equity returns

Strategic Acquisitions Involves identifying and delivering synergy

Hard synergies → Cost Synergies

• $100 of cost-saving = $100 of pre-tax profit
• Cost savings from Economies of scale, Factory overhead reduction, etc.

Soft Synergies → Revenue Synergies

• $100 of revenue synergy less than $100 of pre-tax profit
• Cross-selling opportunity
• Scope for geographic expansion
• Opportunity for corporate overhead reduction

Acquirer & Target Model steps

• Assumptions
• Income Statement
• Balance Sheet
• Cash Flow Statement
• Supporting Schedules
• DCF Model

Mergers & Acquisitions Financial Modelling Steps (How to incorporate Acquirer & Target Co. figures)

• Revenue <- Revenue

• Cost of Goods Sold <- Raw Materials & Direct Labor

• Marketing & Advertising <- Sales, Advertising & Promotion

• General & Admin <- Office expenses, Insurance etc.

• Depreciation & Amortization <- Depreciation & Amortization

Deal Assumptions

• Transaction Inputs
• Synergies & Financing
• Purchase Price
• Sources & Uses of Cash
• Purchase Price Allocation (PPA)

Building a Pro-Forma Model

Pro Forma Model = Acquirer Model + Target Model + Adjustments

Accretion & Dilution

Accretive

EPS Before the Acquisition < EPS After Acquisition (Rising)

Dilutive

EPS Before the Acquisition > EPS After Acquisition (Falling)

EPS Impacted by From of Consideration

All Shares (EPS tend to decline)

All Cash (EPS tend to increase)

Types of Mergers & Acquisitions 

• Horizontal Integration – Two entities in the same line of the business combine/merge, usually to achieve synergies.

• Vertical Integration – The acquisition of one entity by another, which, is at a different level in the Supply Chain and consist of forward and backward integration.

Forward Integration – The company acquires a target that either make use of its products to manufacture finished goods or is the retailer.

Backward Integration – The company acquires a target that produces the raw material or the ancillaries which are used by the acquirer, to ensure an uninterrupted supply of high-quality raw materials at a fair price.

• A Conglomerate – Two business in unrelated businesses combine.

Mergers & Acquisitions Financial Model!

Anup N. Amatya & Associates – Financial, Business & Management Consultants

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Author: Anup Narsingh Amatya