Learn the step-by-step process of building a mergers and acquisitions model in Excel and conducting an accretion/dilution analysis, using Google and Motorola as a case study.
Mergers and acquisitions (M&A) is a general term that describes the consolidation of companies or assets through various types of financial transactions.
You can find separate videos on M&A theory and accounting. In this video, we will actually build an M&A Model in Excel and perform accretion/dilution analysis for that.
We have acquired Google and target company Motorola. We’ll perform the model in 4 steps.
Step 1: Deal Assumptions
Step 2: Acquirer shares issued, Target offer value and standalone pretax net income for both
Step 3: Pro Forma Net Income
Pro Forma earnings describe a financial statement that has hypothetical amounts (estimates) built into the data to give a picture of a company’s profit if certain nonrecurring items were excluded. Pro forma earnings usually leave out one-time expenses that are not a part of normal company operations, such as restructuring costs following a merger.
Step 4: Accretion / Dilution Analysis
An accretion/dilution analysis is a simple test used to evaluate the merit of a proposed merger or acquisition deal. The accretion/dilution analysis determines if the post-transaction earnings per share (EPS) are increased or decreased.
If we see accretion, it’s a good sign and the M&A transaction seems to make sense. However, you need to take into consideration not only quantitative analysis when analyzing an M&A deal but a qualitative as well to make sure that strategically the M&A transaction makes sense for both acquirer and target.