Wall Street Prep

Welcome back to the Wall Street Prep Quick Lesson Series!

An important part of investment banking is understanding mergers and acquisitions (M&A). Within M&A, One of the core models investment banking analysts and associates have to build when analyzing an acquisition is the accretion/dilution model. The underlying purpose of such an analysis is to assess the impact of an acquisition on the acquirer’s expected future earnings per share (EPS).

Ready to Model? Before diving in to the videos below, be sure to download this lesson's Excel model template: Accretion dilution Excel model template.

M&A Modeling, Part 1

M&A Modeling, Part 2

Conclusion

This is a brief introduction to the concepts and adjustments underlying accretion/dilution analysis and modeling. These are, of course, just a few of the many issues that come into play when building an accretion/dilution analysis. Other adjustments that we did not include include:

  1. Advanced Purchase Price Allocation concepts including deferred taxes and the treatment of in-process research & development
  2. Modeling asset sales, 338(h)(10) elections, and stock sales
  3. Modeling an Advanced Sources & Uses of Funds schedule
  4. Target debt considerations
  5. Calendarization and stub year challenges in Excel

Extra fun

Click here to see how accretion/dilution is integrated into M&A pitchbooks prepared by Goldman Sachs and Lazard.

Have a Question?

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Imran Khan
Imran Khan

Thanks a lot. Extremely helpful in understanding how a basic M&A model is prepared. Would have been great if you had also explained how to create the what-if analysis (sensitivity analysis) table.

Haseeb Chowdhry
Haseeb Chowdhry

Imran,

Great question - we cover sensitivity tables in many courses, including our Excel Crash Course, the Financial Statement Modeling Course, and the Discounted Cash Flow course. Thanks!

- Haseeb

Yoni
Yoni

Hi, thanks for sharing these lessons. The videos, however, are coming up blank with sound only. Thanks

Haseeb Chowdhry
Haseeb Chowdhry

Yoni,

Have you undergone any troubleshooting? Is this problem still persisting? Please let us know - thanks!

Elliot
Elliot

Just curious- How do you create the sensitivity analysis at the bottom of the excel spreadsheet to update with offer and % assumptions.

Haseeb Chowdhry
Haseeb Chowdhry

Elliott,

We build the sensitivities using the same tools discussed in the Excel Crash Course and the Finanical Statement modeling courses - it involves using the data table command (Alt A W T). Hope this helps!

Vishal
Vishal

Haseeb, Shannon, This M&A tutorial was very educational and appreciate the value! A less pertinent question on modeling but more on accounting treatment - what is the incentive of writing-up an asset if the final result towards Net Income is negative, and therefore lower EPS? Is it purely to increase… Read more »

Haseeb Chowdhry
Haseeb Chowdhry

Vishal,

Writing up assets on the balance sheet provides additional tax benefits for the acquirer. More tax shields means less taxes, and it's even better when the deal is an asset sale b/c that leads to real cash tax benefits. Hope this helps!

Tom
Tom

Excellent overview! Helps to start with an overview and work into the details.

John
John

Why did you use only $5m as the asset write up value? Can you show how you obtained this figure when there was a 60% bid premium?
Thanks

Haseeb Chowdhry
Haseeb Chowdhry

John, The offer premium is a separate question from an appraisal of fixed and intangible assets that are confirmed at the later stage of the deal. The premium is the buyer's willingness to pay for the asset based on transaction comps and for synergies, and in a fundamental belief that… Read more »

Jethro J.
Jethro J.

Thank you for the Accretion/Dilution model! This was very helpful for case studies and for other future references!

Shannan Wilson
Shannan Wilson

You're welcome, Jethro!

Titi
Titi

Very interesting topic and useful insights.

However, I didn't quite understand why only the financing fee amortisation was deducted in the pro-forma net income. I would really appreciate your feedback.

Thanks again.

Shannan Wilson
Shannan Wilson

Hi Titi, When a company borrows debt to finance an acquisition, the fees related to this borrowing are treated differently from advisory, legal, and accounting fees. Underwriting fees are capitalized and amortized over the life of the debt issuance. This creates an incremental amortization expense which reduces pro forma net… Read more »

Luis A. Rodriguez
Luis A. Rodriguez

Wall Street Prep Team, With my newly found powers acquired with the lesson M&A Modeling Part 1, was able to call the spade in the Bayer - Monsanto announced deal. Acquiring the information from various sources (Bloomberg, Reuters, Google and Yahoo Finance) have the chance to modeled the deal, using… Read more »

Shannan Wilson
Shannan Wilson

Luis,
Glad you enjoyed the lesson and it's proving useful!

Manchit
Manchit

Extra fun link is not working. showing error 404

Shannan Wilson
Shannan Wilson

Hi Manchit,
The link seems to be working fine, but in case you are still having trouble, here it is directly (https://www.sec.gov/Archives/edgar/data/1289592/000110465908061187/a08-23639_1ex99dc3.htm).
Shannan

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