Project Quillon — Full Merger Model & Competing Bid

Purchase accounting is applied to the target's balance sheet as it stands on the closing date, not as it stood at the last audited year end. When close falls mid-year — here nine months into the fiscal year — that balance sheet has not happened yet, so it must be projected: working capital driven off stub revenue, equity grown by stub net income, and cash left to fall out as the residual of a stub cash flow. Everything the allocation touches, from book equity to the PP&E base being written up, comes from this projection, which is why an unproven roll-forward contaminates the entire model downstream.

The bridge from what you paid to what you bought. Equity purchase price less the book value of equity acquired, adjusted for the historical goodwill and intangibles that do not survive the transaction, plus the fair value written up on tangible and identifiable intangible assets, plus and minus the deferred taxes those write-ups create and destroy. Goodwill is the residual, what is left after every identifiable asset has been recognized at fair value. It is not amortized; the write-ups are, and their amortization is the charge that separates reported earnings from cash earnings for years afterwards.

Writing an asset up for book purposes without writing it up for tax purposes creates a temporary difference: future book depreciation and amortization on the step-up are not deductible, so future book tax expense exceeds future cash tax. The difference is recognized at close as a deferred tax liability at the marginal rate on the total step-up, and it unwinds as the step-up amortizes. This is why the pro forma income statement charges the new D&A pre-tax and tax-effects it at the statutory rate rather than carrying a separate cash-tax adjustment; the unwind is doing that work.

The same transaction produces two earnings figures depending on whether the amortization of acquired intangibles and the incremental depreciation from the write-up are charged or added back. Neither is wrong and neither is complete: adjusted earnings are defensible as a cash-flow proxy and indefensible as a measure of whether the acquisition was worth doing, because the amortization being excluded is the cost of the very assets the price was paid for. What is not defensible is failing to declare which basis you are on, or comparing a pro forma on one basis against a standalone on the other.

Synergies are usually presented as a run rate, but a run rate is not a value. Turning one into a value requires taxing it, charging what it costs to achieve, discounting it — and choosing how many years to run. The choice dominates the answer: the same program discounted over five explicit years, ten, twenty, or capitalized into perpetuity produces wildly different figures, and none of them is more mathematically correct than the others. Naming the horizon and defending it is the analysis; capitalizing to perpetuity because it makes the deal clear its hurdle is the failure.

Integration and restructuring costs are the price of the synergies and they arrive first. Where they are not tax deductible, their pre-tax and after-tax amounts are identical, which makes them heavier relative to the after-tax synergies they buy — an untaxed cost against a taxed benefit. Front-loaded spend against back-loaded savings can make the early net cash flows of a synergy program negative even when every individual stream is positive, and the discounting weights exactly those early years most heavily.

An acquirer that funds cash first, then debt, then stock does not get to choose its consideration mix freely; the mix is a consequence of the price. Available cash is capped by a minimum operating balance, and new debt is capped by a total leverage test measured against LTM EBITDA and existing gross debt. Below a certain offer price the debt capacity absorbs the deal and the share count never moves; above it the cap binds and stock enters the consideration, changing the denominator of the EPS bridge and the answer to the currency question at the same time. That crossover is solved from the funding identity, not searched for.

A signed merger agreement is a toll booth rather than a wall, and the toll is charged to the wrong party in most candidates' answers. If the target terminates to accept a superior proposal it owes the first bidder a fee, typically a low single-digit percentage of equity value. That fee is an obligation of the target company, not a deduction from the merger consideration: the target's holders receive whatever the winning bid offers, in full, so the price a competing bid has to beat is the agreed price and nothing more. But a buyer funds the company it buys, and the company it buys is poorer by the fee it has just paid. The fee therefore lands on the interloper, which is why the price to beat and the all-in cost of winning are two different numbers. The second is the one any valuation ceiling has to be read against.

The three terms that decide whether a competing bid is possible and what it has to look like. A no-shop stops the target running a process after signing; a fiduciary out preserves the board's ability to engage with an unsolicited proposal that could be superior, and to terminate for one; a matching right gives the signed bidder notice and a short window to revise before the board can move. Together they are what lets a board sign a deal without foreclosing a better one, which is what an all-cash sale of control requires of it. For the interloper the practical consequences are tactical: the approach has to be unsolicited and in writing, the incumbent will see the price and may simply match it, and a bid pitched at the minimum that wins on paper is the one most likely to be matched.

Two standard yardsticks for whether a price is sensible, and they can point in opposite directions on the same transaction. A premium is measured against the unaffected market price, so it is only as informative as that price was correct; if the market was already carrying the target richly, a modest-looking percentage premium sits on top of an already-stretched valuation. A multiple is measured against the company's own financial performance and carries no such dependency. When the two disagree, the disagreement is the finding, and the analyst's job is to explain which yardstick is being distorted rather than to average them.

A terminal export is an input, not an analysis. Turning it into a yardstick means excluding businesses whose model differs from the target's, excluding scale outliers, excluding transactions old enough to describe a different market, catching unit errors, and then computing medians rather than means so a single survivor cannot drag the set. Every exclusion has to be defensible out loud, because in a live process the exclusions are what the other side attacks first.

An accretion/dilution test stops at the earnings bridge: combine two income statements, charge the funding, divide by a pro forma share count and compare against standalone. A full merger model adds the balance sheet. You project the target's closing balance sheet, allocate the purchase price across it, take up write-ups and the deferred taxes they create, combine the two balance sheets and carry the resulting amortization through the income statement. That is why a merger model runs to ninety minutes where an EPS test runs to thirty, and why purchase accounting — which short-form tests explicitly exclude — is the spine of the exercise rather than a footnote.

Work down a fixed schedule. Start with the equity purchase price. Deduct the book value of the equity you are acquiring, measured at close. Remove the target's existing goodwill and existing intangible assets, because acquired goodwill does not carry over and the old intangibles are replaced. Add the new identifiable intangibles recognized at fair value and any write-up on tangible assets such as property, plant and equipment. Write off deferred tax balances the instructions tell you do not survive, and create a new deferred tax liability at the marginal rate on the total step-up, since the step-up is not deductible for tax. What is left after all of that is goodwill, a residual rather than an input. Finally, convert each step-up into an annual charge over its stated life; goodwill itself is not amortized.

Because purchase accounting is applied on the closing date, and if the deal closes part way through a fiscal year, the balance sheet on that date does not exist yet. Every input to the allocation comes from it: the book equity you deduct, the asset bases you write up, the deferred tax balances you eliminate. So you roll the last actual balance sheet forward by a stub period — working capital driven off stub revenue, equity grown by stub net income, capital expenditure and depreciation run through, and cash falling out as the residual of the stub cash flow. Proving the projected sheet balances is not housekeeping; because cash is the residual, the balance check is the only independent evidence the roll-forward is right.

No, and conflating them is the most common analytical error in merger analysis. Accretion says your reported earnings per share went up. That can happen simply because you bought earnings on a lower multiple than your own shares trade on, or because you funded with debt cheaper after tax than your own earnings yield — neither of which says anything about whether you paid less than the asset is worth. Value creation is a comparison of price against value: what the target is worth standalone, plus the synergies you can actually underwrite, against what you have to pay to get it. A deal can be accretive and value-destroying, or dilutive and value-creating. That is exactly why this case asks for both an EPS bridge and a value ceiling, and does not let either stand alone.

Report both, label both, and be explicit about what each excludes. Adjusted or cash EPS adds back the amortization of acquired intangibles and the incremental depreciation from write-ups, which makes it a reasonable proxy for cash generation and the basis most acquirers guide the market on. But that amortization is the cost of the assets you paid for, charged against the earnings those assets produce, so excluding it flatters an acquisition by construction. The rule that keeps you out of trouble is procedural: whichever basis you lead with, compute the acquirer's standalone comparison on the same basis. The error that produces confidently wrong answers is adjusting one side of the comparison and not the other.

Take the pre-tax streams year by year, tax them at the marginal rate, subtract the costs to achieve — integration and restructuring — remembering that where those costs are not deductible their pre-tax and after-tax amounts are the same, and discount the net after-tax figures at the acquirer's cost of capital. Two choices then dominate the answer and both are judgment. First, the horizon: an explicit five-year window, ten years, twenty, or a perpetuity with a terminal growth rate produce very different values from identical inputs. Second, the realization assumption: what share of the announced program actually lands. State both, and sensitize the result to the second, because a synergy value quoted without a horizon is not a number anyone can check.

It raises the cost of winning, and it is worth being precise about whose cost. Under a signed merger agreement, if the target terminates to accept a superior proposal it owes the first bidder a fee, usually a low single-digit percentage of equity value. The fee is an obligation of the target company; it is not netted out of the merger consideration, so the target's holders receive the competing offer in full and the price that offer has to beat is simply the agreed price. The interloper is the one who ends up paying: it funds the company it acquires, and that company has just paid the fee out. So a competing bid carries the agreed price plus the fee per share as its all-in cost, and that is the number a valuation ceiling has to be read against. Two other terms matter as much as the fee. A no-shop with a fiduciary out is what makes an unsolicited approach possible at all. And a matching right — a notice period during which the first bidder may revise — means a bid pitched a cent above the agreed price mostly buys the incumbent information, so the realistic winning price sits above the arithmetically minimum one.

Yes, and the agreement itself usually says how. A target board that has agreed to an all-cash sale of the whole company is in Revlon: its duty is to seek the best value reasonably available, which is a duty to be reasonably informed and to act reasonably rather than a duty to accept the highest number on the table. The standard deal-protection package is built around that. A no-shop stops the target soliciting, but a fiduciary out lets the board engage with an unsolicited written proposal reasonably likely to lead to a superior one, and terminate to accept it on payment of the break-up fee. A matching right gives the first bidder notice and a few business days to revise before the board may change its recommendation. Fees are sized to be survivable rather than preclusive; a fee no bidder could clear reads as a lock-up, and boards cannot agree to protections that leave them no exit. And "superior" is a judgment about completion as well as price, so financing certainty and regulatory risk are part of what a board is comparing. For an interloper that means three things: the door is open, the incumbent gets to see your price and answer it, and the fee is a cost you carry.

Start with cost. The after-tax cost of new debt is the coupon less the tax shield; the cost of stock is roughly the acquirer's own earnings yield, being the earnings per share given away to fund the purchase; the cost of balance sheet cash is the interest income it stops earning, also after tax. Rank them on the actual assumptions rather than the rule of thumb, because the ordering flips with rates and with the acquirer's own multiple. Then add the two considerations cost alone misses. Stock shares the risk of having misjudged the target with the seller, which matters most when you suspect the asset is richly priced; cash with no financing condition offers certainty of close, which is worth something real to a board choosing between two offers. And check whether the choice is even yours. If a leverage cap binds at the price you are contemplating, the mix is an output of the funding waterfall rather than a decision.

By respecting the dependency chain and by filling right rather than building block by block. The tabs are strictly sequential, so time spent perfecting a later block before an earlier one is proven is time you may have to spend again. Author one column of logic for the projection years and fill it across; the later years' EPS bridges are the first year's bridge copied over with the period reference shifted. Anchor assumption references before you drag, not after. Prove each balance check the moment you can, since a residual that balances is free evidence. And follow the build order on the template's cover, which budgets the sixty minutes across the tabs and names the block to abandon if the clock beats you. Partial completion is expected here and is graded, so long as the chain reaches a recommendation.