When companies are involved in the process of evaluating potential mergers, a thorough analysis is required to determine whether the merger is financial sense. This includes performing the discounted cash flow (DCF) model for each business, comparing and contrast with trading comparables and prior transactions. Additionally, it involves calculating future synergies that will be realized when the deal is completed. This is a complex procedure that requires the expertise of an analyst in finance who has experience in M&A modeling.
An analysis of dilution and accretion is vital to determine the profitability. This analysis determines if the merger will enhance or decrease the earnings per share (EPS), post-transaction, of the acquiring company. It starts by estimating pro forma net income to determine the pro-forma earnings per Share (EPS). A rise is considered to be accretive, while the opposite would be considered dilutive.
The analysis should also take into account the effects of the merger on the competition between the merging firms and the market. This is a possibility that could have negative effects on competition, such as offers to the company that are merged and the increased concentration of power in the market. While there is some research in this area but more research is needed to identify quantitative analyses suitable to evaluate the competitive impact of horizontal mergers. Moreover, the research should look at what other obstacles to coordination currently exist in the market and how a merger might alter this.
