Mergers, Acquisitions, Divestitures, and Other Restructurings, + Website

Chapter 7Income Statement

Now that we have a primary indication of assumptions, we can proceed with the merger integration. The general concepts of a combination are similar to what we discussed for the accretion/dilution analysis: we simply add together everything from revenue down to net income, except for items relating to the target company's shareholders' equity and the target company's net debt. We then make four categories of transaction adjustments: postmerger cost savings, new intangible asset amortization, new debt interest, and new shares raised. These concepts are relatively identical when combining two income statements in a full-scale merger model. However, since a full-scale analysis allows more detail, the procedure may vary in some areas. For example, in a full-scale model we have the ability to project depreciation on assets in a separate depreciation schedule. So, where in an accretion/dilution analysis we simply added Company A and Company B depreciation and amortization, in a full-scale merger model, we will reconstruct depreciation and amortization in the depreciation and amortization schedule as we typically do in any full-scale model. Another major difference lies with the net interest expense. In the accretion/dilution analysis, we estimate net interest by taking just the acquirer's net interest (we eliminate the target net interest, assuming target debt has been paid down). We then estimate any new interest expense incurred if debt is raised to fund ...