How to Build a Merger Model: 5 Key Steps to Follow

02 February 2018
Have you ever tried building a merger model in Excel and found it as easy as solving a Rubik's cube blindfolded? If so, you're not alone.
A person writing a checklist on a notepad
Three things to consider when building a merger model are the DCF models, valuation, transaction structure, warranties, debt and equity.

Let's dive into this complex, yet fascinating world of merger modelling with some tips and tricks to help you.

Building a Merger Model: Step-by-Step

Start with DCF Models

Begin by creating Discounted Cash Flow (DCF) models for both companies. This part can feel like forecasting the weather—subjective and often unpredictable. You’ll face challenges with subjective assumptions and forecasting techniques, but it's crucial to get this step right.

Valuation: The Heart of the Matter

Next, blend your DCF results with an analysis of comparables, recent deals, and merger premiums. This mix will give you the relative valuations of the companies. Remember, every merger is unique, so your model needs to be bespoke.

Consideration and Transaction Structure

Decide on the form of payment—cash or shares. Even in mergers of equals like Daimler-Benz and Chrysler, you'll need to determine relative valuation. Take Disney's takeover of 21st Century Fox as a cautionary tale—carefully consider all factors to avoid surprises.

Handle Warranties and Share Options

Be mindful of warranties and share options. These can quickly dilute value. Also, don’t forget fees payable and goodwill, as they can unbalance a deal just as fast.

Debt and Equity

Introduce any potential replacement debt and additional equity into the model. Different debt/equity ratios and costs of capital can make or break the deal. Highlighting the required financial engineering is a must to excite investors and ensure success.

The Crucial Role of Synergy

Synergy sounds like a magic ingredient, right?

Well, it is, but it’s tricky.

High projected synergies can make any merger look attractive, but you need to balance cost savings against integration expenses—both in quantity and timing. Here are some key points to remember:

  • Financials of Both Companies: Different accounting practices require attention.
  • Restructuring Process: Asset disposals, reorganisation of equity, and structured debt must all be modelled.
  • IFRS Merger Accounting: Constantly changing standards need to be incorporated.

Worksheets Essentials

While there's no absolute rule, here are the usual suspects for your merger model worksheets:

  • Assumptions: Your starting points.
  • Raw Financial Data: The foundation.
  • DCFs for Each Company: For contribution analysis.
  • Synergies: To justify combined income statements.
  • Combined Financial Statements: Income statements, balance sheets, and cash flow statements.
  • Debt Schedules: Tracking obligations.
  • Tax Implications: Don’t overlook these.
  • Risk Analysis: Sensitivity and scenario analysis to understand potential impacts.

Making Sense of the Numbers

Once your model is up and running, it’s time to answer the big question: What happens to the Earnings Per Share (EPS) of the combined entity?

The model can now start to generate answers, such as what will happen to the Earnings Per Share (EPS) of the combined entity by comparison to its two predecessors. If EPS is projected to fall, the model is already indicating that the deal may fail. All of this, and indeed every aspect of the model, is rendered more difficult when the acquirer is launching a hostile bid, as companies will not part with information readily. A difficult task, and one that really requires specialist training.

Ready to Master Merger Modeling?

Building a merger model isn't just about crunching numbers. If the acquirer is making a hostile bid, access to information can be a major hurdle. It’s a tough job and requires specialist training to navigate these complexities effectively.

If you found this guide helpful and want to dive deeper into the world of financial modelling for mergers and acquisitions, check out our comprehensive course. Our expert instructor will equip you with the skills and knowledge you need to excel.

Otherwise our modelling for mergers and acquisitions masterclass will take your modelling ability one step further with a more in-depth analysis.


How long does it take to do a merger model?

Creating a merger model can take anywhere from a few days to several weeks, depending on the complexity of the deal, the availability of data, and the level of detail required. Simple models might be completed in a few days, while more intricate ones involving multiple scenarios, detailed synergies, and comprehensive financial analysis can extend over several weeks. Specialist training and experience can significantly streamline this process.
Eager to master financial modelling and raise your business skills and capital? Click below to find out more about Redcliffe Training’s Financial Modelling courses:

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