Merger Consequences

What is Merger Consequences Analysis?

Merger consequences analysis is important for assessing the impact of an M&A transaction. When the leadership/owners of a sufficiently sized company are pitched a merger or acquisition proposal, the company needs to take into consideration the financial impact that the transaction may have on the acquirer’s pro forma financial position. One of the most common ways of doing this is with accretion/dilution analysis.

Measuring the Impact on Per-Share Metrics

In order to fully analyze the impact, the company owners must compare the stand-alone acquirer to the newly combined business. An effective way of doing this is through EPS accretion/dilution. This is a simple test that shows whether the proposed deal will increase or decrease the post-transaction earnings per share (EPS) for the buyer.

In order to obtain a break-even impact on EPS, pre-tax synergies are required. However, this analysis must also be performed in conjunction with other valuation methods, as there are transactional effects that can increase EPS artificially without actually increasing firm value.

The acquiring company must calculate possible future earnings to plan for the transition of ownership. This is done via pro forma calculations, which include hypothetical amounts or estimates. These pro forma statements indicate the projected financial position of the potential buyer.

Learn merger consequences step by step in CFI’s mergers and acquisitions financial modeling course.

Pro Forma Analysis

Using pro forma calculations to estimate the “benefit” of a merger or acquisition is important, as it allows the acquirer to determine what price he is willing/ able to pay. Beyond the amount that he is willing to pay, there is the form of consideration that he is able to use in order to pay for the transition of ownership (cash, stock, other securities, or a combination). All of this then ties into how the deal will be structured and what type of tax considerations will be taken/given.

Used by Both Buyers and Sellers

Not only does the acquirer (buyer) need to analyze the consequences of a merger, but the seller must also determine if it makes sense to them. Will merging the company be good for business both financially and credibility wise? Will acquiring the company allow the seller to earn a sufficient return on their capital?

Read More About M&A

CFI is the official provider of the Financial Modeling & Valuation Analyst designation and on a mission to help you advance your career. To learn more, check out the following CFI resources:

• Tax-Free Reorganization
• Type A Reorganization
• Section 368
• Debt Schedule
• Income Statement
• See all financial modeling resources