4. Analyzing the Acquirer


This lesson examines the recent financial performance of both the Acquirer in our proposed deal. We do this primarily by examining the Income Statement, which may help us understand the motivations behind this deal.

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  1. Lesson Goal (00:04)

    The goal of this lesson is to analyze the performance of ShirtShop by studying their Income Statement.

  2. Layout of the Excel Model (00:33)

    When we create a merger model in Excel, it’s useful to use multiple sheets. In our model, there is one sheet for the merger model, one sheet for the financial statements of the acquirer, and one sheet for the financial statements of the target. In our model, ShirtShop is the acquirer and TrouserTown is the target. The target sheet also tells us the proposed price per share and the equity value of the target company in the transaction.

  3. Analyzing the Acquirer’s Income Statement (01:28)

    In order to understand the proposed transaction, we want to analyze the financial statements of the acquirer, ShirtShop. In our model, we have historical values and future projections for the company’s Income Statement. We first want to analyze revenue growth, which gives us an indication of how the company is performing. In our case, Shirtshop’s revenue growth is slow. Improvements are projected in future years, but these projected values may not actually occur.

    We also want to analyze profitability, by studying the net profit and EBITDA, as well as their margins. The ideal values here vary by industry. In our example, a clothing retailer should ideally have a net profit margin above 5% and an EBITDA margin above 10%. Shirtshop struggles to hit both these targets.

    A merger has the potential to reduce costs and increase revenue, and therefore improve profitability. Shirtshop would hope this is the case if they merge with TrouserTime. However, these synergies are uncertain, and the transaction will cost ShirtShop a large amount of money.


As we saw in the previous lesson, Shirt Shop are keen to purchase a company called TrouserTown, which has 317 stores in the MidWest and Southwest of the United States. TrouserTown is a privately held company, with a reputation for slow growth, prudent management, and a conservative chief financial officer. As the company is private, the management team doesn't suffer the same pressures from public shareholders that the Shirt Shop management team does. Let's now move to Excel and learn a little bit more about the transaction. As we can see from the spreadsheet, Shirt Shop have decided to bid $67.90 per share for TrouserTown, which results in an equity price of 1.283.5 billion.

You as a research analyst at an investment bank are required to figure out which company will profit more from this deal. To do this we will need to examine the financials of both companies to understand the impact of synergies, and then estimate the combined value of the two companies under the terms of the deal. When building a model like this in Excel, it's useful to use multiple tabs. I typically use one tab to be the merger model, another to be the acquirer, and another to be the target. In this case, Shirt Shop is the acquirer and TrouserTown is the target. Let's start by examining Shirt Shop. So I'll move to the Acquirer tab and scroll to their Income Statement.

The first thing I can immediately notice is that their growth is pretty meager, averaging below 1% for the previous three years, apart from 2016.

It does show increase growth projections for the future five years, but these are certainly not guaranteed. It's no wonder management team are coming under pressure to find ways to grow the business and that M and A has been touted as a big opportunity. With growth clearly an issue, let's now take a look at profitability. When I scroll down to the very bottom, I have Net Profit and EBITDA, along with Net profit margin and EBITDA margin. For a clothing retailer, a net profit margin of 5% or above is considered adequate. Unfortunately, Shirt Shop has struggled to reach that level over the past couple of years. Similarly, we'd like to see an EBITDA of higher than 10% for a clothing retailer in the U.S. under the current market conditions. And, again, Shirt Shop is struggling to hit that target. The cost synergies touted in the deal with TrouserTown would hopefully help this profitability, but it remains to be seen if the revenue synergiees can help grow the top line. What's more, we're going to have to pay over a billion dollars to purchase TrouserTown. And we're not sure yet where Shirt Shop is going to find that money from. So in the next lesson, we'll take a look at the Balance Sheet and see where the funds for this deal might come from.