When companies are involved in the process of evaluating potential mergers an in-depth analysis is required to determine whether the merger is in financial sense. This involves executing the discounted cash flow (DCF) model for each business, comparing and contrasting with trading comparables and similar transactions. It also involves calculating future synergies to be realized once the deal has been concluded. This is a complicated process and requires the expertise of a competent financial analyst who knows M&A modeling.
An analysis of dilution/accretion is essential in determining the profitability. This analysis determines whether the merger will enhance or decrease the earnings per share (EPS) post-transaction of the company that is acquiring. It starts by estimating pro forma net income to arrive at the acquirer’s pro-forma Earnings per Share (EPS). A rise in earnings is thought to be a positive, while a decline is regarded as a negative.
The analysis must also consider the effects of the merger on the nature of the competition between the merging companies and the market. This could result in anti-competitive effects, including offers for the newly merged company as well as increased power concentration on the market. There is some research in this area but more work is needed to establish quantitative studies that are suitable for assessing the impact on competition of horizontal mergers. Moreover, the research should analyze what other obstacles to coordination currently exist in the market and how a merger would alter these.
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