To determine if a merger is financially sense, companies need to do a thorough study. This involves executing an estimated cash flow (DCF) model for each business, and comparing and contrasting it with trading counterparts and precedent transactions. Additionally, it involves calculating future synergies that can be realized once the deal is completed. This is a difficult step and requires the assistance of a competent financial analyst who is knowledgeable of M&A modeling.
Particularly, an accretion/dilution analysis is essential for determining the financial viability of a merger. This analysis determines whether the merger will increase or decrease earnings per share (EPS), post-transaction, of the acquiring firm. It begins by estimating proforma net income to determine the pro-forma Earnings per Share (EPS). An increase in earnings is regarded as a positive while a decrease is considered to be negative.
The analysis should also take into account the effects of the merger on the competition between the merging firms and the market. This includes the possibility of adverse effects to competition, such as offers made to a merged company or a greater concentration in power on the market. While there is some research on this subject however, more research is required to find quantitative analyses that are suitable to assess the competitive effects of horizontal mergers. Moreover, the research should analyze what other obstacles to coordination already exist in the market and how a merger would alter these.