To evaluate the consequences of a merger, it is best to build a financial model of the merged firm starting from its balance sheet at the planned closing date, advises Enrique R. Arzac in ‘Valuation for Mergers, Buyouts, and Restructuring,’ second edition (

“The process starts with the study of the historical operating characteristics of the acquirer and the target and their forecast. The operating characteristics include revenue growth, operating margins, depreciation, net working capital requirements, and capital expenditures.” Also, take into account the planned financial policy of the merged company, he reminds.

In a chapter on ‘deal making with difference of opinion,’ the author observes that in general a deal can take place only if there is a difference of opinion among the parties about the value being exchanged, because both have to believe that the transaction makes them better off. “For example, if the seller’s discount rate is 20 per cent and the buyer’s is 12 per cent, there are potentially many prices to transact the cash flows.”

Where differences of opinion – about value, risk, and so on – create difficulties for the consummation of a deal, the role of the dealmaker assumes importance, for creating a deal structure that is satisfactory to both parties, Arzac notes.

Valuable reference.

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