We create TargetCo’s P&L in nearly the exact same way that we put together BuyerCo’s P&L, so we’ll skip the intermediate steps and go straight to the final product.
Since we are building a merger model, it is necessary to align the target’s reporting period with the acquirer’s reporting period. For example, if TargetCo has a fiscal year end of December 31 and BuyerCo has a fiscal year end of September 30, we need to time-shift TargetCo’s P&L to match BuyerCo’s reporting period. In this example, we assume that TargetCo and BuyerCo both have a fiscal year end of September 30.
Additionally, we apply the acquirer’s tax rate to the target’s income statement when building a merger model. So, we link the tax rates in TargetCo’s income statement to those in BuyerCo’s P&L. It may sometimes be helpful to plug the target’s actual historical tax rates into the spreadsheet first to ensure that the GAAP figures you calculate match those that were reported, then link to the acquirer’s tax rates.
The are two assumptions we make in the TargetCo P&L that are worth noting. First, we think that applying 2010’s 0.5% revenue growth to years 2011 and 2012 is a bit too conservative, so we instead input a growth rate of 1.0%. Second, capital expenditures (“capex”) was not available for 2010 in the Wachovia research report used, so we flatlined 2010 capex using 2009’s capex as a percent of sales.
