Financial Analysis for a Potential Merger
To determine whether a merger makes financial sense, companies must perform a thorough analysis. This involves a discounted cashflow (DCF), comparing and contrasting trading comparables, and precedent transactions. It also involves calculating future synergies which will be realized after the deal is concluded. This is a difficult step and requires the services of a competent financial analyst who is familiar with M&A modeling.
Particularly an accretion/dilution study is essential for determining the viability of any merger. This analysis determines whether the merger will boost or decrease the earnings per share (EPS), post-transaction, of the acquiring firm. It starts by estimating pro-forma earnings per share (EPS) of the buyer. An increase in earnings is regarded as a positive, while a decline is considered to be negative.
The analysis should also take into account the effects of the merger on the nature of the competition between merging firms and the market. This includes the possibility of negative effects on competition, such as offers for the merged company and the increased concentration of power on the market. There is some research in this field but more work is needed to establish quantitative studies that are suitable to evaluate the effects on competition of horizontal merges. The research needs to also investigate other barriers to coordination that currently exist on the market, and how a merger can change this.