How to use financial statements to mergers and acquisitions?
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Answer:
Financial Statements
The first step in evaluating a merger's financials is to obtain the target company's financial statements. If both companies are already discussing a merger, each company can sign a non-disclosure agreement and exchange financials.
If you are not yet in the discussion stage, try searching equity analyst reports and news articles for any publicly available information. If you cannot retrieve enough information, interview experts in the field. Major customers, the management of competing companies, or equity analysts that cover similar companies can all provide helpful financial details. Although you probably will not be able to obtain full financial statements via this method, you should be able to get high-level details such as average revenue, expenses, debt and cash flow.
As you analyze the financials of the merger, utilize both the historical and forward-looking financials to see a picture of how the company has performed in the past and how they are expected to perform in the future.
Income Statement
Income statements illustrate the financial profitability of a company. The revenue line of the income statement illustrates the company’s top-line momentum, while the expenses show whether or not the company is using its resources wisely.
Combine both company’s income statements to illustrate the income statement of the combined company. For most items on the income statement, you can use simple addition to combine each company’s financials. Pay special attention to the tax and income expense lines. The tax rate is based on a complex equation of size, tax havens, grants and credits. Meanwhile, income expense is based on debt interest rates. Banks base interest rates on the leverage and liquidity of a given company. Because of the complexities involved in these line items, it is best to consult with an accounting expert to find the correct tax rate and interest rate for the merged company.