In this chapter, we examine how the acquirer combines its financial projections with those of the seller. The acquirer constructs a computer model of the deal and subjects it to a variety of operating and finance scenarios. The acquirer then considers which valuation and financial arrangement is acceptable to its constituencies. If the model indicates the M&A results are within the seller’s expectations, the chances of a transaction are significantly enhanced.
At this point in the process, the potential acquirer has admitted certain facts and completed certain objectives:
- The acquirer acknowledges that M&A has no success guarantee.
- The acquirer knows that most M&A deals involve either (1) one competitor buying another or (2) a company purchasing a firm with a similar product line.
- The acquirer has conducted a historical financial analysis of the seller.
- The acquirer has completed financial projections of the seller.
- The acquirer has calculated a reasonable price for the seller, based on several valuation methods.
- The acquirer has considered the possible synergies in a deal.
With this foundation in place, the acquirer is ready to combine its projections with those of the seller to determine if the transaction works from a financial point of view.
Combining the Buyer’s and Seller’s Projections
Developing a transaction’s computer financial model involves five steps:
- Combine stand-alone projections ...