Glossary
M&A & Merger Modeling
Every term in the track, defined in plain English. These definitions also pop up when you hover the dotted terms inside lessons - and feed your flashcard review.
Deal basics
- Merger Model
- A model that measures the impact of an acquisition on the buyer's earnings per share (EPS), combining the two companies' financials with the deal's financing and accounting effects.
- Accretion
- An increase in the buyer's pro forma EPS as a result of the deal. The market generally views accretion positively.
- Dilution
- A decrease in the buyer's pro forma EPS after the deal - often read as a sign the buyer may have overpaid.
- Pro Forma
- The combined company 'as if' the deal had already closed - the financials after purchase accounting, financing, and synergies are applied.
- Synergies
- The extra value - added revenue or saved cost - that the combined company can capture but the two standalone companies could not. Modeled net of the cost to achieve them.
- Revenue Synergies
- Incremental revenue from combining (cross-selling, new markets, pricing power). Harder to deliver, so usually haircut heavily.
- Cost Synergies
- Cost savings from eliminating duplication (overhead, facilities, procurement scale). More credible than revenue synergies and usually the bulk of synergy value.
- Strategic Buyer
- An operating company that acquires a target it can integrate and extract synergies from - often able to pay more than a financial sponsor.
- Financial Sponsor
- A private-equity firm acquiring a company for financial return, typically via a leveraged buyout rather than for operating synergies.
Pricing & consideration
- Control Premium
- The amount paid above a target's current share price to gain control - usually 20-40%, benchmarked against precedent transactions.
- Offer Price
- The per-share price the buyer bids: current price x (1 + control premium).
- Offer Value
- The total equity purchase price: offer price per share x target diluted shares.
- Consideration
- The form of payment to the target's shareholders - cash, the buyer's stock, or a mix of both.
- Cash Consideration
- The portion of the price paid in cash, usually funded with newly raised debt. Adds interest expense but issues no new shares.
- Stock Consideration
- The portion paid in the buyer's own shares. Adds no interest but issues new shares that dilute EPS.
- Exchange Ratio
- In a stock deal, the number of buyer shares exchanged for each target share. Can be fixed or floating.
- Sources & Uses
- A table showing where the deal's funding comes from (debt, equity, cash on hand) and where it goes (purchase price, fees). The two sides must balance.
- Transaction Fees
- One-time advisory and legal costs of the deal. Expensed, so they hit earnings once.
- Financing Fees
- The cost of raising the deal's debt. Capitalized and amortized over the life of the loan, like a small recurring D&A.
Purchase accounting
- Purchase Price AllocationPPA
- Allocating the purchase premium across asset write-ups and goodwill so the combined balance sheet reflects fair values.
- Purchase Premium
- Offer value minus the target's net tangible book value - the amount that must be allocated to write-ups and goodwill.
- Net Tangible Book Value
- A company's tangible assets minus its total liabilities - the book starting point before any write-ups.
- Asset Write-Up
- Increasing the carrying value of acquired PP&E or intangibles to fair value. Creates new (incremental) depreciation/amortization.
- Goodwill
- The part of the premium not tied to identifiable assets. Sits on the balance sheet indefinitely and is tested for impairment rather than amortized.
- Deferred Tax LiabilityDTL
- A liability created when book D&A from write-ups exceeds tax-deductible D&A, so future cash taxes will exceed book taxes. Equals tax rate x write-ups.
- Incremental D&A
- The extra depreciation and amortization from asset write-ups - a recurring drag on pro forma pre-tax income.
Accretion / dilution
- Pro Forma EPS
- Pro forma net income divided by pro forma diluted shares - the output the whole merger model is built to produce.
- P/E RatioP/E
- Share price divided by EPS. In an all-stock deal, a buyer with a higher P/E than the deal P/E it pays is accretive.
- Earnings Yield
- The inverse of the P/E (EPS / price). Used to compare the cost of paying in stock against the after-tax cost of debt.
- Breakeven Synergies
- The level of synergies that leaves pro forma EPS exactly equal to the buyer's standalone EPS - the dividing line between dilutive and accretive.
- Diluted Shares Outstanding
- Total shares including the effect of options and convertibles - plus any new shares issued to fund a stock deal.