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Financial Analysis for a Potential Merger

In order to determine if a merger is financial sense, companies must conduct a thorough analysis. This involves executing a discounted cash flow (DCF) model for each business, and comparing and contrast with trading comparables and similar transactions. It also involves calculating prospective synergies that can be realized after the deal has been completed. This is a complex step that requires the expertise of an analyst with financial experience who has expertise in M&A modeling.

In particular an accretion/dilution review is essential for determining the potential profit of any merger. This analysis determines if the merger will boost or decrease earnings per share (EPS) post-transaction of the acquiring firm. The process begins by estimating pro-forma earnings per share (EPS) of the buyer. An increase in earnings is thought to be a positive, while a decline is considered to be negative.

The analysis must also consider the effects of the merger on the nature of the competition between merging companies and the market. This includes the possibility of anti-competitive effects, including offers for the merging company and heightened concentration of power on the market. There is some research in this field, but more work is needed to establish quantitative analyses that are suitable to evaluate the effects on competition of horizontal merges. Additionally, the research should investigate what other barriers to coordination are already in the market and how a merger might alter these.

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