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Learn/M&A & Merger Modeling/Module 1
1.3·6 min read

Sizing the Two Companies

Before any deal math, profile each company: share price, shares, equity value, EPS, and the P/E multiple.

By the end you can
  • ✓Compute equity value and P/E
  • ✓Set up the buyer and target profiles a model starts from
Equity Value=Share Price×Diluted SharesP/E=Share PriceEPS\text{Equity Value} = \text{Share Price} \times \text{Diluted Shares} \qquad \text{P/E} = \frac{\text{Share Price}}{\text{EPS}}
The two numbers every merger model opens with.
Worked example · Profile the acquirer and the target
Given
  • •Acquirer: $40.00 share price, 600M shares, $4.00 EPS
  • •Target: $16.00 share price, 200M shares, $2.00 EPS
Solution
  1. 1.Acquirer equity value
    40×600=$24B40 \times 600 = \$24\text{B}
  2. 2.Acquirer P/E
    40/4.00=10.0×40 / 4.00 = 10.0\times
  3. 3.Target equity value
    16×200=$3.2B16 \times 200 = \$3.2\text{B}
  4. 4.Target P/E
    16/2.00=8.0×16 / 2.00 = 8.0\times
Answer

The acquirer trades at 10.0x and the target at 8.0x. That P/E gap will drive whether a stock deal is - the focus of Module 5.

Check yourself

A company trades at $30 with $3.00 of EPS. Its P/E is:

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Why Companies Acquire
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Offer Price & Control Premium