Mergers & Acquisitions (M&A) Model

The primary goal of an M&A model is to determine if an acquisition will result in EPS accretion (an increase in Earnings Per Share) or EPS dilution (a decrease in Earnings Per Share) for the acquirer. This is essential because EPS is a key metric that investors and shareholders use to evaluate the success of the deal.

Here, we’re modeling the acquisition of VMware by Broadcom. Broadcom is the acquirer, and VMware is the target.

Step 1: Transaction Assumptions

What it is: The blueprint of the model, listing all the key data points and estimates.

Why it's needed: To ensure the analysis is transparent, accurate, and can be easily adjusted to test different scenarios (known as sensitivity analysis).

Broadcom (Acquirer)

• • Share Price: $575.00

  • Shares Outstanding: 415 million

  • Net Income: $11.5 billion

  • Standalone EPS: $27.71

VMware (Target)

• • Shares Outstanding: 422 million

  • Net Income: $1.8 billion

Other Key Assumptions

• • Tax Rate: 21%

  • Annual Pre-Tax Synergies: $2.0 billion (To justify paying a premium for a target, an acquirer almost always projects cost savings or revenue growth (synergies). While you can run a model with $0 synergies, it's not realistic for most large deals. )

  • Target's Net Debt Assumed: $5 billion ($10B Debt - $5B Cash)

  • Transaction Fees (Amortized): $50 million/year

Deal & Financing

• • Offer Price per Share: $142.50

  • Financing Mix: 50% Stock / 50% Cash

  • Interest Rate on New Debt: 5.0% (This is only necessary if the cash portion of the deal is funded by raising new debt. If the acquirer uses cash from its own bank account, you would instead need an assumption for Foregone Interest on Cash (the opportunity cost of spending that cash).

Step 2: Transaction Value & Financing

What it is: The calculation of the deal's total price tag and the breakdown of the payment method.

Why it's needed: To establish the cost of the deal, which in turn determines the amount of new interest or new shares that will be created.

1. Equity Purchase Price

   • $142.50 (Offer Price) × 422M (Shares) = $60.14 billion

2. Stock & Cash Portions

   • Stock Portion: $60.14B × 50% = $30.07 billion

   • Cash Portion: $60.14B × 50% = $30.07 billion

Step 3: Pro-Forma (Combined) Figures

What it is: The creation of a projected, combined income statement (Earnings) and total share count (Shares) for the new company.

Why it's needed: To calculate the new "E" and "S" for the EPS formula, making sure to include all deal-related financial adjustments like synergies and interest costs.

You calculate the "E" first, (Earnings).

• Broadcom Pre-Tax Income ($11.5B / 0.79): $14.56 billion 

• 1 - 0.21 (Tax Rate) = 0.79

• So, Net Income = Pre-Tax Income × 0.79

• Therefore, Pre-Tax Income = Net Income / 0.79

Do the same for VMware

• + VMware Pre-Tax Income ($1.8B / 0.79): +$2.28 billion

• + Pre-Tax Synergies: +$2.00 billion

• - Interest on New Debt ($30.07B × 5.0%): -$1.50 billion (This is the new annual interest expense from the debt taken on to fund the deal. It's a tax-deductible expense, so we subtract it from pre-tax profit. )

• - Amortized Transaction Fees: -$0.05 billion (These are the costs for bankers and lawyers. We're spreading the one-time fee over five years for accounting purposes. This is also a tax-deductible expense.)

• = Pro-Forma Pre-Tax Income for BOTH company: $17.29 billion (14.56 +2.28+2-1.50-0.05) = 17.29

Taxes ($17.29B × 21%): -$3.63 billion

17.29 + (-3.63) = 13.66

Pro-Forma Net Income: $13.66 billion (After Tax)

Now, you calculate the "S", (Shares)

B) Pro-Forma Share Count Calculation

1. New Shares Issued

   • $30.07B (Stock Portion) / $575.00 (Share Price) = 52.3 million (Broadcom is paying for half the deal with its stock. We divide the stock portion's value ($30.07B) by Broadcom's share price ($575) to find out exactly how many new shares it needs to create and give to VMware's shareholders.)

2. Pro-Forma Shares Outstanding

1. • 415M (Broadcom) + 52.3M (New Shares) = 467.3 million (415m from Broadcom is the outstanding shares they can give.)

Step 4: Pro-Forma EPS Calculation

What it is: This is the final calculation where we determine the new Earnings Per Share (EPS) for the combined company.

Why it's needed: This step produces the single most important number in our analysis. It combines the new "Earnings" and new "Shares" to show the company's profitability on a per-share basis after the deal.

Formula: Pro-Forma Net Income / Pro-Forma Shares Outstanding = New EPS 

Pro-Forma Net Income: $13.66 billion

Pro-Forma Shares Outstanding: 467.3 million

NEW EPS = 29.23

Step 5: Final Accretion / Dilution Analysis

Finally, we compare the old and new EPS.

• Old EPS (Broadcom Standalone): $27.71

• New Pro-Forma EPS (Combined): $29.23

Conclusion: The deal is highly accretive. The new EPS is $1.52 higher than Broadcom's original EPS, an increase of 5.5%. The strong synergies and Broadcom's high stock price are the key drivers of this positive result.

1. Transaction Assumptions (Listing all key inputs like share prices, net income, financing mix, and synergy estimates).

2. Transaction Value & Financing (Calculating the total purchase price and determining the mix of cash and stock used to pay for it).

3. Pro-Forma Figures (Combining the companies' financials and adjusting for deal impacts to find the new net income and new total share count).

4. Pro-Forma EPS Calculation (Dividing the new pro-forma net income by the new pro-forma share count).

5. Final Accretion / Dilution Analysis (Comparing the new pro-forma EPS to the acquirer's original EPS to declare the deal accretive or dilutive).