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
MA Illustration 1
MA Illustration 2

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


EPS Before the Acquisition < EPS After Acquisition (Rising)


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)

MA Model Steps

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