Merger Model

Description
Making Acquisition Assumptions:


Where the buyer’s stock is undervalued, the buyer may decide to use cash instead of equity consideration since they would be forced to give up a significant number of shares to the target company.
In contrast, the target company may want to receive equity because it might be more valuable than cash. Finding a consideration agreeable to both parties is a crucial part of striking a deal.
In contrast, the target company may want to receive equity because it might be perceived as more valuable than cash. Finding a consideration agreeable to both parties is a crucial part of striking a deal.
Key assumptions include:
Purchase price of the target
Number of new shares to be issued to the target (as consideration)
Value of cash to be paid to the target (as consideration)
Synergies from the combination of the two businesses (cost savings)
Timing for those synergies to be realized
Integration costs
Adjustments to the financials (mostly accounting-related)
Forecast/financial projections for target and acquirer
Making Projections:
Making projections in a merger model is the same as in a regular DCF model or any other type of financial model. In order to forecast, an analyst will make assumptions about revenue growth, margins, fixed costs, variable costs, capital structure, capital expenditures, and all other accounts on the company’s financial statements. This process is known as building a 3-statement model and requires linking the income statement, balance sheet, and cash flow statement. Build this section just as you do with any other model, and repeat it twice: once for the target and once for the acquirer.