Major flaws with the accretion/dilution analysis

• Lack of full-scale financials
• Pro-forma balance sheet
• Interest expense: neglecting the debt that could be paid down each year
• Postmerger cost savings
• Depreciation & amortization: it would be more accurate to combine the total assets and rebuild a depreciation schedule from scratch

Building a full-scale model

1. Assumptions (purchase price, sources, and uses)
2. IS
3. CF
4. BS adjustments
5. Depreciation schedule
6. Operating working capital schedule
7. BS projection
8. Debt schedule

1. Assumptions

The purchase price may change depending on

• The number of options/warrants exercisable
• The share price of the acquirer

2. IS

Possible ways to manage the consolidation of “other income”

• Fully consolidated: as the “other income” is probably related to the target’s core operation
• Target’s line item eliminated: non-recurring & extraordinary cases
• New projections: for very large mergers => projected independently

Preferred stocks of the target would be eliminated with the acquisition.

Sometimes it’s ok to “adjust” the EPS to exclude extraordinary losses that lead to negative earnings.

Content source: Paul Pignataro. (2020) Mergers, Acquisitions, Divestitures, and Other Restructurings.