What is the first step in conducting a merger model?

Determining the purchase price is a critical first step in conducting a merger model because it sets the baseline for the entire analysis. The purchase price influences how the deal is structured, the valuation of each company involved, and the subsequent financial metrics that will be analyzed, such as accretion or dilution of earnings per share. It directly affects calculations of the cost of financing, whether through debt, equity, or a combination of both, and informs negotiations during the merger process.

Establishing the purchase price allows analysts to understand the financial implications of the merger from the outset. Once the price is determined, other components like how to finance the deal and how it affects the combined company’s financials can be explored in more depth. Therefore, this foundational step is vital as it provides the framework for all subsequent calculations and assessments in the merger model.