Knowledge Base: Merger Model Tutorials

Merger Models are used to analyze the effects of a merger or acquisition in which one company acquires another company.

A “merger” means the companies are similarly sized, and the deal may be 100% Stock or have a high Stock component; in an acquisition, one company is substantially bigger than the other.

But there is always a buyer or seller in any M&A deal.

The basic idea behind a merger model is that an acquirer pays a Purchase Price for the target company and may fund the deal with a combination of Cash, Stock, and Debt (or just one or two of these).

Each funding source has a different “cost,” so from a financial perspective, acquirers want to use the lowest-cost funding source (Cash) as much as possible.

When the deal closes, you combine the financial statements of the acquirer and target and calculate metrics like EPS accretion/dilution to determine if the acquirer is better or worse off on a per-share basis.

EPS accretion/dilution is significant because Earnings per Share (EPS) is the only Income Statement metric that reflects the full impact of the deal financing: Foregone Interest Income on Cash Used, Interest Expense on Debt Used, and the additional shares from Stock Issued.

Since EPS is defined as Net Income / Shares Outstanding, and since Net Income includes Interest Income and Interest Expense, this metric is very useful for analyzing M&A deals.

We present below merger model-related tutorials, samples, and excerpts from our courses: