Financial Analysis for a Potential Merger

When companies are involved in the process of evaluating potential mergers and acquisitions, a thorough analysis is necessary to determine whether the merger makes sense financially. This involves a discounted cashflow (DCF), comparing and contrast trading comparables, as well as previous transactions. It also involves calculating future synergies which will be realized after the deal is completed. This is a difficult step and requires the assistance of a highly skilled financial analyst who knows M&A modeling.

An analysis of dilution/accretion is essential to determine the profitability. This analysis determines whether or not the merger will increase or reduce the post-transaction earnings per share (EPS) of reference the company that is acquiring. It starts by estimating pro forma net income in order to calculate the pro-forma earnings per Share (EPS). A rise is regarded as beneficial, while a decrease would be considered dilutive.

The analysis should also consider the effects of a potential merger on the existing nature of competition in the marketplace and between the merging companies. This includes the potential for anti-competitive effects, like offers made to a merged company or an increased power of the market. While there is some research on this subject however, more research is required to determine the right quantitative analysis for assessing the competitive impacts of horizontal mergers. Furthermore, the study should analyze what other obstacles to coordination already exist in the market and how a merger could alter these.

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