martin007

Hello All,

I would like to ask some help regarding one technical aspect of merger. I am writing an essay from M&A topic and I encountered one problem: when combining balance sheet and using purchase accounting method additional goodwill needs to be calculated according to formula offered price x outstanding shares - book value of equity. My first thought was to use price which I calculated from DCF of target, but then I realized that this is not fully correct price which acquirer can offer because it does not include synergies which are calculated according to formula PV(merged company)-PV(acquirer)-PV(target), this implies that combination of balance sheets for merged company should come before the calculation of offer price with synergies, because first balance sheets need to be combined to make DCF of merged entity. So here appears a circle: price with synergies is needed to combine balance sheets, but this price can only be calculated in the very end after balance sheets are combined. What could You suggest? P.S. I am not allowed to use pooling method.

Thank You in advance!

maxellis

I have not seen synergies calculated the way you lay it out (although it seems like an interesting idea of the markets take on expected synergies). I would take it as a % of sales or % of sg&a which would solve the problem.

However, if you choose to calculate it like this it is a circular function (as you correctly laid out). Turn iterations to 100 on excel and this should solve the problem. It might ref out, it which case just build in a circ buster.

Goodwill = equity price paid -bv of equity - transaction fees