Skip to content
Scrim
Learn/M&A & Merger Modeling/Module 4
4.1·8 min read

From Standalone to Pro Forma

Add the two companies' pre-tax earnings, then adjust for the real effects of the deal: interest, fees, synergies, and incremental D&A.

By the end you can
  • ✓Convert net income to pre-tax income
  • ✓Apply the four pro forma adjustments
Net Income=EPS×SharesEBT=Net Income1−Tax Rate\text{Net Income} = \text{EPS} \times \text{Shares} \qquad \text{EBT} = \frac{\text{Net Income}}{1 - \text{Tax Rate}}
Work in pre-tax income (EBT) so a single tax rate can be applied to the combined entity.
Worked example · Each company's standalone EBT
Given
  • •Acquirer: $4.00 EPS x 600M shares
  • •Target: $2.00 EPS x 200M shares
  • •Tax rate: 20%
Solution
  1. 1.Acquirer net income
    4.00×600=$2,400M4.00 \times 600 = \$2{,}400\text{M}
  2. 2.Acquirer EBT
    2,400/(1−0.20)=$3,000M2{,}400 / (1 - 0.20) = \$3{,}000\text{M}
  3. 3.Target EBT
    (2.00×200)/0.80=$500M(2.00 \times 200) / 0.80 = \$500\text{M}
Answer

Consolidated EBT before deal effects is 3,000 + 500 = $3,500M.

Now layer in the four effects of the deal. Three of them hurt earnings (new interest, one-time , and the from the ); one helps (net ).

bridge$M
Consolidated EBT3,500
Less: interest + financing amortization(108)
Less: (one-time)(100)
Plus: net 200
Less: (35)
Adjusted pre-tax income3,457
Interest = $100 on $2,000 of debt at 5%; financing amortization = $8; D&A from Module 3.
Check yourself

A company has $480M of net income and a 20% tax rate. Its pre-tax income (EBT) is:

← Previous · 3.3
Goodwill
Next · 4.2 →
Pro Forma EPS & the Verdict