And if you’re feeling brave, you can check out JP Morgan’s financial statements right here to get a sense of what you might see with a real bank. Check out the full course and the samples there for more financial institution fun. A bank’s income statement is split into non-interest revenue and expenses (see below) and interest revenue and expenses (self-explanatory). Rather, it’s that since a high percentage of their revenue and profit comes from interest and investments, we need to analyze, value, and model them differently anyway. They take premium fees received upfront from customers (which are like a bank’s deposits) and invest that cash in stocks, bonds, real estate, and more, aiming to earn a solid return in the process. Banks and financial institutions also sell “products and services,” but these “products and services” consist of money rather than tangible items.
For instance, if an established company acquires a startup known for its flexible work culture, efforts should be made to preserve the startup’s entrepreneurial spirit while incorporating it into the larger organization’s culture. This involves fostering open communication, promoting collaboration, and creating a shared vision for the combined organization. For example, in the case of a merger between two retail chains, immediate priorities might include harmonizing pricing strategies and optimizing inventory management, while long-term goals could involve consolidating store locations and rebranding. Not all integration activities can be executed simultaneously, and it is crucial to prioritize them based on their impact and dependencies. These objectives could range from achieving cost synergies and expanding market reach to leveraging complementary capabilities.
Given the offer value of $4 billion and 50% cash consideration, $2 billion in debt was used to fund the purchase, i.e. the cash consideration side. The target’s forecasted EPS is assumed to be $2.00, so the P/E ratio is 8.0x, which is 2.0x turns lower than the acquirer’s P/E. If we assume the acquirer’s forecasted earnings per share (EPS) is $4.00, the implied P/E multiple is 10.0x. We’ll now move on to a modeling exercise, which you can access by filling out the form below.
Merger and acquisition modeling involves several principles that are critical for evaluating the financial impacts of a merger or acquisition. An M&A model is a financial tool used in corporate finance to evaluate the potential impact of a merger or acquisition between two companies. Next, the market cap of each company is calculated as its current share price multiplied by its current diluted shares outstanding (for both acquirer and target).
Before the transaction, the acquirer had 600 million diluted shares outstanding, but to partially finance the deal, 50 million more shares were newly issued. In order to acquire the target, the acquirer must bid an offer price per share with a sufficient premium to incentivize the company’s board and shareholders to accept the proposal. On the date of the analysis, the acquirer’s share price is $40.00 with 600 million diluted shares outstanding – therefore, the acquirer’s equity value is $24 billion. However, the model still ensures that the market’s reaction to the deal’s announcement (and potential impact on the share price) is taken into account. While the Microsoft-LinkedIn deal was a strategic deal, many deals are done where the acquirer is a private equity company (financial deal). The merger proxy includes a list of all the entities and individuals that hold significant amounts of target shares.
Double-Counting or Missing Synergies
If the objective is to optimize consumer welfare, Williamson suggests that the law should only allow a merger if it can result in efficiencies that do not increase the price. The debt repayment tracking in an LBO makes the calculations more complex than in an M&A model, even if the latter includes debt financing. The leverage reference is used because debt is typically the largest option for paying the purchase price. We show you their transaction history, fee structure, and estimated valuations for your company. You can also agree on payment forms such as cash, stock, debt, or combinations of these three.
What are the common financial valuations and assumptions that are required?
You need to follow the best practices and standards for financial modeling, such as using clear and consistent formulas, labels, and formats, and avoiding hard-coding and circular references. Once you have the historical data and the key drivers and assumptions, you can build the projection model and calculate the financials of the combined entity. Before you can project the future financials of the combined entity, you need to have a solid understanding of the historical financial performance and position of both the target and the acquirer. Gather and align the historical financial data of the target and acquirer. For example, if Company A wants to acquire Company B, which has a unique competitive advantage or strategic fit with Company A, using transaction multiples may not capture the value of these synergies and result in a low offer price. The disadvantage is that it may not be updated or relevant, as the historical transactions may have different motives, synergies, or market environments than the current deal.
Valuation of Each Business
Advanced techniques in merger modeling aren’t just about crunching numbers; they’re about crafting a strategy that anticipates the future. You’ll estimate the purchase price for the target company, decide on how many new shares might be issued, and consider the capital needed. A merger model is like a blueprint for combining two companies.
Financial modeling can help evaluate the feasibility and impact of M&A transactions on the value and profitability of the involved companies. Financial modeling is the process of creating a representation of a company’s financial situation and performance, using historical data, assumptions, and projections. This analysis helps the buyer understand the impact of the target’s financial performance on the combined company’s EPS.
Therefore, it is essential to understand and model these requirements accurately in financial modeling. The financial reporting and disclosure requirements can have a significant impact on the valuation, synergies, goodwill, and earnings of the combined entity. One of the most important aspects of merger and acquisition (M&A) is the financial reporting and disclosure requirements that apply to the combined entity. Proper tax planning and structuring can help optimize the financial benefits of the merger or acquisition. Both acquiring and target companies must consider the interests of various stakeholders, including shareholders, employees, and customers.
Post-Merger Evaluation and Performance Analysis
An M&A model (sometimes referred to as a “merger model”) is a type of analysis that is used when two companies combine through the M&A process. A merger model is a tool used to evaluate the financial consequences when two companies combine into one. Sensitivity analysis is all about understanding how different variables can impact the outcome of a merger model. When you’re building a merger model, the assumptions you make are like the GPS for your financial projections.
- For insurance firms we start with the income statement because everything flows from the premiums that customers pay to sign up for policies.
- Scenario analysis is especially useful for identifying risks and opportunities, allowing companies to prepare for a range of possibilities.
- There was no reverse termination fee in the Microsoft-LinkedIn deal.
- The analysis should also consider the external factors and events that may have affected the performance, such as macroeconomic conditions, competitive dynamics, regulatory changes, etc.
- Establish data-sharing agreements with the target company to ensure transparency and access to accurate information.
They involve evaluating the financial performance, health, and value of the target company, as well as identifying and mitigating any potential risks or issues that may arise from the deal. Financial analysis and due diligence are crucial steps in the process of merger and acquisition (M&A). The pro forma financial statements are based on the adjustments and assumptions that are made to account for the M&A transaction, such as the purchase price allocation, the financing structure, the accounting policies, or the synergy realization.
- Financial projections and forecasting are essential for evaluating the feasibility and attractiveness of a potential deal, as well as for planning and executing the integration process.
- An LBO also involves an exit valuation, as, at the time, the private equity hopes to sell the acquired company.
- There are different ways to measure the success of an M&A deal, depending on the perspective and the purpose of the evaluation.
- We now need to calculate the diluted shares outstanding by adding any shares created by options.
- Financial projections are like a crystal ball for the future of the merged companies.
- During an M&A transaction, corporate governance plays a vital role in ensuring fairness and accountability.
Accretion and dilution
Consolidated income statement, balance sheet, and cash flow statement reflecting the combined entity with purchase accounting adjustments. Includes purchase price allocation and transaction costs. BIWS Bank & Financial Institution Modeling Course prepares you for FIG interviews and the job itself with tutorials on bank accounting, valuation, M&A, and buyout modeling. Believe it or not, the math actually works and you can get decent returns even with absolutely no leverage – mostly because even slight tweaks to ROE can make a huge impact on the final year shareholders’ equity number. So rather than a traditional DCF model, you use the dividend discount model (DDM), which uses the firm’s dividends as a proxy for cash flow. P / E, similar merger model to EBITDA for normal companies, measures how valuable the firm is relative to its profitability; you use P / E rather than EBITDA or EBIT because you want to include interest for financial institutions.
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Understanding how to present and interpret sensitivity analysis is essential for accretion/dilution interview questions. How sensitive are results to synergy timing assumptions? Synergies improve pro forma earnings, making deals more accretive (or less dilutive).