{"id":31250,"date":"2025-04-09T12:17:40","date_gmt":"2025-04-09T17:17:40","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/?post_type=biws_kb&#038;p=31250"},"modified":"2025-12-17T00:21:01","modified_gmt":"2025-12-17T05:21:01","slug":"tariff-model","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/tariff-model\/","title":{"rendered":"Tariff Apocalypse: Trade Wars and Tariffs in Financial Models and Valuation"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-flat ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Tariff Apocalypse: Trade Wars and Tariffs in Financial Models and Valuation<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/tariff-model\/#Tariff_Model_Scenario_1_The_Company_Absorbs_the_Extra_Costs\">Tariff Model Scenario #1: The Company Absorbs the Extra Costs<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/tariff-model\/#Tariff_Model_Scenario_2_The_Company_Passes_Along_the_Extra_Costs_to_Customers\">Tariff Model Scenario #2: The Company Passes Along the Extra Costs to Customers<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/tariff-model\/#Tariff_Model_Scenario_3_The_Company_Passes_Along_the_Extra_Costs_But_Also_Sells_Fewer_Units\">Tariff Model Scenario #3: The Company Passes Along the Extra Costs But Also Sells Fewer Units<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/tariff-model\/#Tariff_Model_Are_There_Any_Positive_Scenarios\">Tariff Model: Are There Any Positive Scenarios?<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/tariff-model\/#Tariff_Model_M_A_Deals_and_EPS_AccretionDilution\">Tariff Model: M&amp;A Deals and EPS Accretion\/Dilution<\/a><\/li><\/ul><\/nav><\/div>\n\n<blockquote><p><strong>Tariff Model Definition:<\/strong> In corporate finance and valuation, <strong>tariffs<\/strong> increase the prices that companies pay for imported parts, materials, and supplies and make a \u201cvery negative\u201d to a \u201cclose to neutral\u201d impact on their profits and cash flows; they also tend to reduce companies\u2019 values and make M&amp;A deals more dilutive.<\/p><\/blockquote>\n<p>With all the recent headlines about the trade war between the U.S. and China (and seemingly every other country in the world) and the threat of <strong>tariffs<\/strong> everywhere, we thought it might be useful to look at their impact <strong>on financial models<\/strong>.<\/p>\n<p>To be clear, this is <strong>not<\/strong> a policy statement or an article about politics.<\/p>\n<p>As with any policy shift, tariffs will create winners and losers, and even though most <em>companies<\/em> will be worse off, you could argue that they will help workers, governments, and specific industries.<\/p>\n<p>Here\u2019s the short version of how tariffs affect financial models, valuations, and M&amp;A deals:<\/p>\n<ul>\n<li>Contrary to much online discourse, tariffs are <strong>not<\/strong> a \u201cconsumption tax\u201d but an <strong>additional corporate tax<\/strong> on imported physical goods\/materials\/supplies that companies often have difficulty passing on fully to customers, reducing their margins.<\/li>\n<li>Tariffs <strong>can be inflationary<\/strong>, but the impact varies widely by industry and company and factors like the sources of the raw materials, the degree of market competition, and the company\u2019s position in the value chain.<\/li>\n<li>Tariffs tend to <strong>reduce corporate profits<\/strong> by pushing down <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/gross-margin\/\" target=\"_blank\">Gross Margins<\/a>, as companies must pay a tax on imported supplies, parts, and materials; this also reduces their <a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/how-to-calculate-free-cash-flow\/\" target=\"_blank\">Free Cash Flow<\/a> and may even make the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/change-in-working-capital\/\" target=\"_blank\">Change in Working Capital<\/a> more negative.<\/li>\n<li>Tariffs <strong>increase the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/finance\/discount-rate\/\" target=\"_blank\">Discount Rate<\/a><\/strong> in valuation because they increase uncertainty and overall risk, which may push up the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/finance\/risk-free-rate\/\" target=\"_blank\">Risk-Free Rate<\/a>, Equity Risk Premium, and other components of <a href=\"https:\/\/mergersandinquisitions.com\/wacc-formula\/\" target=\"_blank\" rel=\"noopener\">WACC<\/a>.<\/li>\n<li>Because of the reduced cash flows and the increased Discount Rate, <strong>tariffs usually reduce companies\u2019 valuations<\/strong>, but neutral and even slightly positive impacts are sometimes possible.<\/li>\n<li>From an M&amp;A perspective, deals generally become <a href=\"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/eps-accretion-dilution\/\" target=\"_blank\">more EPS-dilutive<\/a> when both companies are subject to tariffs because it increases their expenses and reduces their <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/net-income\/\" target=\"_blank\">Net Income<\/a> and <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/earnings-per-share-formula\/\" target=\"_blank\">Earnings per Share (EPS)<\/a>.<\/li>\n<\/ul>\n<p>Modeling the full complexity of tariffs is beyond the scope of this short tutorial, but we present below a few simple scenarios:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31251 size-full\" title=\"Tariff Model Scenarios\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121036\/01-Tariff-Model-Scenarios.jpg\" alt=\"Tariff Model Scenarios\" width=\"1498\" height=\"244\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121036\/01-Tariff-Model-Scenarios.jpg 1498w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121036\/01-Tariff-Model-Scenarios-300x49.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121036\/01-Tariff-Model-Scenarios-1024x167.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121036\/01-Tariff-Model-Scenarios-768x125.jpg 768w\" sizes=\"(max-width: 1498px) 100vw, 1498px\" \/><\/p>\n<h3><strong>Files &amp; Resources:<\/strong><\/h3>\n<ul>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/108-18-Tariff-Model-Slides.pdf\" target=\"_blank\" rel=\"noopener\">Tariff Model \u2013 The Impact of Tariffs on Corporate Finance, Valuation, and M&amp;A \u2013 Slides (PDF)<\/a><\/li>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/108-18-Tariff-Model.xlsx\" target=\"_blank\" rel=\"noopener\">Merger Model with Tariff Support (XL)<\/a><\/li>\n<\/ul>\n<div class='code-block code-block-1' style='margin: 8px 0; clear: both;'>\n<div class=\"kb-adinsert-modal\">\n    <div class=\"kb-adinsert-top\">\n      <div class=\"media\">\n          <img decoding=\"async\" class=\"alignnone size-full wp-image-28448\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/03\/13030021\/IB-Interview-Guide.png\" alt=\"Investment Banking Interview Guide\" width=\"128\" height=\"128\" \/>\n      <\/div>\n      <div class=\"content\">\n          <h3>Gain an \u2018Unfair Advantage\u2019 With the <strong>BIWS Investment Banking Interview Guide<\/strong><\/h3>\n      <\/div>\n    <\/div>\n    \n    <div class=\"full_text\">\n    \t<ul>\n        \t<li>\n            \t<h4>Pitch yourself like a pro<\/h4>\n              <p>Use our templates to answer the \u201cWalk me through your resume\/CV\u201d question<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Ace the technical questions<\/h4>\n            <p>Learn the concepts so you don\u2019t have to \u201cmemorize\u201d anything<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Prepare efficiently for \"fit\" questions<\/h4>\n            <p>Re-use the same few stories to answer any fit\/behavioral question\n\n<\/p>\n\t\t\t  <\/li>\n      <\/ul>\n        \n      <a class=\"cta-link orange-button-medium\" href=\"https:\/\/breakingintowallstreet.com\/investment-banking-interview-guide\/\" target=\"_blank\">Full Details<\/a>\n      \n      <a class=\"cta-link orange-button-medium bg-blue\" href=\"https:\/\/biws-support.s3.us-east-1.amazonaws.com\/Course-Outlines\/IB-Interview-Guide-Course-Outline.pdf\" target=\"_blank\" rel=\"noopener\">Short Outline<\/a>\n    <\/div>\n<\/div>\n<\/div>\n\n<h3><strong>Video Table of Contents:<\/strong><\/h3>\n<ul>\n<li><strong>0:00:<\/strong> Introduction<\/li>\n<li><strong>1:30:<\/strong> The Short Answer<\/li>\n<li><strong>4:51:<\/strong> Part 1: How to Add Tariff Support to Models<\/li>\n<li><strong>9:35:<\/strong> Part 2: Three Common Scenarios for Tariffs<\/li>\n<li><strong>11:45:<\/strong> Part 3: How Tariffs Affect M&amp;A Deals<\/li>\n<li><strong>14:47:<\/strong> Recap and Summary<\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"Tariff_Model_Scenario_1_The_Company_Absorbs_the_Extra_Costs\"><\/span><strong>Tariff Model Scenario #1: The Company Absorbs the Extra Costs<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>In this scenario, the company has <strong>little pricing power<\/strong>, so it absorbs the extra costs of tariffs and cannot pass on anything to its end customers.<\/p>\n<p>If we assume a 20% increase in Cost of Goods Sold (COGS) per unit but no changes to Revenue or Operating Expenses, the impact might look like this:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31252 size-full\" title=\"Tariff Model - Full Costs Absorbed by Company\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121121\/02-Tariff-Model-Full-Costs-Absorbed.jpg\" alt=\"Tariff Model - Full Costs Absorbed by Company\" width=\"1590\" height=\"986\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121121\/02-Tariff-Model-Full-Costs-Absorbed.jpg 1590w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121121\/02-Tariff-Model-Full-Costs-Absorbed-300x186.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121121\/02-Tariff-Model-Full-Costs-Absorbed-1024x635.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121121\/02-Tariff-Model-Full-Costs-Absorbed-768x476.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121121\/02-Tariff-Model-Full-Costs-Absorbed-1536x953.jpg 1536w\" sizes=\"(max-width: 1590px) 100vw, 1590px\" \/><\/p>\n<p>The <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/gross-margin\/\" target=\"_blank\">Gross Margin<\/a>, Operating Margin, and <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/ebitda\/\" target=\"_blank\">EBITDA<\/a> Margin all fall, but the impact is much worse than a straight 20% drop:<\/p>\n<ul>\n<li><strong>Gross Profits<\/strong> fall by 36% (!) because Revenue stays the same, while COGS increases substantially.<\/li>\n<li><strong>Operating Income<\/strong> falls by over 50% because the company has relatively low <a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/operating-leverage\/\" target=\"_blank\">operating leverage<\/a>, i.e., it has far more variable expenses than fixed ones.<\/li>\n<li><strong>EBITDA<\/strong> also falls by 40 \u2013 50% for similar reasons.<\/li>\n<\/ul>\n<p>This outcome is most plausible in <strong>competitive markets with many substitutes<\/strong> where companies lack pricing power, and customers can easily switch to other vendors.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Tariff_Model_Scenario_2_The_Company_Passes_Along_the_Extra_Costs_to_Customers\"><\/span><strong>Tariff Model Scenario #2: The Company Passes Along the Extra Costs to Customers<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>This is the \u201cunicorn\u201d scenario for companies: They pay extra for their imported parts and raw materials, but they pass along these extra costs 1:1 to the customers.<\/p>\n<p>In this scenario, <strong>there is no impact<\/strong> because Revenue and COGS both increase by the same dollar amount, so Gross Profit, Operating Income, EBITDA, and Net Income all stay the same:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31253 size-full\" title=\"Tariff Model - Neutral Impact Due to Cost Pass-Through\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121210\/03-Tariff-Model-Neutral.jpg\" alt=\"Tariff Model - Neutral Impact Due to Cost Pass-Through\" width=\"1606\" height=\"1189\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121210\/03-Tariff-Model-Neutral.jpg 1606w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121210\/03-Tariff-Model-Neutral-300x222.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121210\/03-Tariff-Model-Neutral-1024x758.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121210\/03-Tariff-Model-Neutral-768x569.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121210\/03-Tariff-Model-Neutral-1536x1137.jpg 1536w\" sizes=\"(max-width: 1606px) 100vw, 1606px\" \/><\/p>\n<p>So, in theory, tariffs could be neutral to a company\u2019s profitability, cash flows, and valuation\u2026<\/p>\n<p>\u2026but in real life, this scenario is unrealistic because few companies can pass on price increases 1:1 to customers.<\/p>\n<p>If they try to do this, <strong>their unit sales often fall<\/strong> because customers are unwilling or unable to buy as much, and the company may have to reverse course and reduce its prices, which hurts its margins.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Tariff_Model_Scenario_3_The_Company_Passes_Along_the_Extra_Costs_But_Also_Sells_Fewer_Units\"><\/span><strong>Tariff Model Scenario #3: The Company Passes Along the Extra Costs But Also Sells Fewer Units<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>That takes us to tariff model scenario #3, which covers this outcome: The company\u2019s per-unit costs increase, it raises its per-unit prices, but <strong>it sells fewer units <\/strong>due to reduced customer demand.<\/p>\n<p>Here\u2019s what it looks like in Excel if we assume a 20% increase in COGS per unit, a full pass-through on the prices per unit, and a <strong>20% decrease<\/strong> in unit sales:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31254 size-full\" title=\"Tariff Model - Reduced Unit Sales\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121246\/04-Tariff-Model-Reduced-Unit-Sales.jpg\" alt=\"Tariff Model - Reduced Unit Sales\" width=\"1604\" height=\"1183\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121246\/04-Tariff-Model-Reduced-Unit-Sales.jpg 1604w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121246\/04-Tariff-Model-Reduced-Unit-Sales-300x221.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121246\/04-Tariff-Model-Reduced-Unit-Sales-1024x755.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121246\/04-Tariff-Model-Reduced-Unit-Sales-768x566.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121246\/04-Tariff-Model-Reduced-Unit-Sales-1536x1133.jpg 1536w\" sizes=\"(max-width: 1604px) 100vw, 1604px\" \/><\/p>\n<p>In this scenario, the company might reverse its price increases or offer more incentives, such as discounts on long-term contracts or free bonuses.<\/p>\n<p>Also, the company might attempt to <strong>cut its Operating Expenses<\/strong> by laying off employees or reducing outside contracts, rent, and other costs.<\/p>\n<p>It would not work well in this case because this company (James Hardie Industries) has little OpEx \u2013 almost all its expenses are variable and show up in the COGS line.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Tariff_Model_Are_There_Any_Positive_Scenarios\"><\/span><strong>Tariff Model: Are There Any Positive Scenarios?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>In theory, a company might come out ahead if it can <strong>raise its prices without paying for additional COGS<\/strong> \u2013 or if it can raise its prices by <em>more<\/em> than the additional COGS while still selling the same number of units.<\/p>\n<p>For example, if Companies A and B both import their raw materials and must pay a tariff on these imports, but Company C does not, something like this could play out:<\/p>\n<ul>\n<li>Companies A and B raise their prices to cover the extra COGS due to tariffs.<\/li>\n<li>Company C does not import its raw materials from other countries, so it is not subject to tariffs, and it has no reason to increase its prices.<\/li>\n<li>But since it sees Companies A and B raising their prices, it does the same thing and earns higher Gross Profits on the difference.<\/li>\n<\/ul>\n<p><strong>However, this scenario is not especially likely because there are very few markets in which some companies import <em>everything<\/em> while others import <em>nothing<\/em> \u2013 it\u2019s almost always a mix of both due to the complexity of global supply chains.<\/strong><\/p>\n<p>Therefore, the bottom line is that tariffs are negative for corporate profits and cash flows and, at best, potentially neutral.<\/p>\n<p>In the long term, there could be even more of an impact <em>if<\/em> companies \u201cre-shore\u201d their sourcing and manufacturing.<\/p>\n<p>This might result in higher CapEx \u2013 but its overall cost structure would be higher in that scenario since they would pay far more for labor and materials.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Tariff_Model_M_A_Deals_and_EPS_AccretionDilution\"><\/span><strong>Tariff Model: M&amp;A Deals and EPS Accretion\/Dilution<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Assuming that both the Buyer and Seller in an M&amp;A deal are subject to tariffs and treat it the same way \u2013 absorb the higher costs, pass on 100% of the additional costs, or pass on the costs but also sell less \u2013 the outcomes in M&amp;A deals are as follows:<\/p>\n<ol>\n<li><strong>Worst Case:<\/strong> If both companies absorb the extra costs 100%, deals tend to get far more dilutive because of the reduced Net Income and EPS.<\/li>\n<li><strong>Middle Case:<\/strong> If companies pay higher COGS but increase their per-unit prices and sell fewer units in the process, deals become more dilutive, but less than in the first case. The exact effect varies significantly by the percentage changes.<\/li>\n<li><strong>Neutral Case:<\/strong> If both companies increase their Revenue and Gross Profits by the same dollar amount, there should be no impact on EPS accretion\/dilution.<\/li>\n<\/ol>\n<p>For reference, here\u2019s the baseline EPS accretion\/dilution for this $8.7 billion deal between <a href=\"https:\/\/ir.jameshardie.com.au\/news\/press-releases\/detail\/83\/james-hardie-and-azek-to-combine-creating-a-leading\" target=\"_blank\" rel=\"noopener\">James Hardie Industries in Australia and The AZEK Company<\/a> in the U.S.:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31255 size-full\" title=\"M&amp;A Deal - Baseline EPS Accretion\/Dilution\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121314\/05-MA-Deal-Baseline-EPS-Accretion-Dilution.jpg\" alt=\"M&amp;A Deal - Baseline EPS Accretion\/Dilution\" width=\"1592\" height=\"382\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121314\/05-MA-Deal-Baseline-EPS-Accretion-Dilution.jpg 1592w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121314\/05-MA-Deal-Baseline-EPS-Accretion-Dilution-300x72.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121314\/05-MA-Deal-Baseline-EPS-Accretion-Dilution-1024x246.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121314\/05-MA-Deal-Baseline-EPS-Accretion-Dilution-768x184.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121314\/05-MA-Deal-Baseline-EPS-Accretion-Dilution-1536x369.jpg 1536w\" sizes=\"(max-width: 1592px) 100vw, 1592px\" \/><\/p>\n<p>These numbers are based on our revenue and expense forecasts for the companies, in line with the consensus view, and the likely impact of the additional Debt and Stock issued in the deal.<\/p>\n<p>And here\u2019s how the numbers change in the worst case and neutral case:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31256 size-full\" title=\"M&amp;A Deal - EPS Changes in Other Tariff Cases\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121517\/06-MA-Deal-EPS-Changes-Other-Cases.jpg\" alt=\"M&amp;A Deal - EPS Changes in Other Tariff Cases\" width=\"1613\" height=\"1034\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121517\/06-MA-Deal-EPS-Changes-Other-Cases.jpg 1613w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121517\/06-MA-Deal-EPS-Changes-Other-Cases-300x192.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121517\/06-MA-Deal-EPS-Changes-Other-Cases-1024x656.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121517\/06-MA-Deal-EPS-Changes-Other-Cases-768x492.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/09121517\/06-MA-Deal-EPS-Changes-Other-Cases-1536x985.jpg 1536w\" sizes=\"(max-width: 1613px) 100vw, 1613px\" \/><\/p>\n<p>This analysis ignores the fact that the companies\u2019 respective valuations might also change <em>before the deal closes<\/em>.<\/p>\n<p>Depending on how the deal is structured, that could be very impactful because the number of shares issued could be <strong>fixed<\/strong> or linked to the acquirer\u2019s share price, depending on <a href=\"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/exchange-ratios-in-ma-deals-fixed-floating-and-collars\/\" target=\"_blank\">the Exchange Ratio used<\/a>.<\/p>\n<p>Linking the Stock issued to the acquirer\u2019s share price (i.e., a Floating Exchange Ratio) would make the numbers even worse by increasing the number of new shares required.<\/p>\n<p>In this case, the Stock component in the deal is based on a Fixed Exchange Ratio, so this is not an issue, but it does create far more risk for the target company (AZEK).<\/p>\n","protected":false},"excerpt":{"rendered":"<p>In corporate finance and valuation, tariffs increase the prices that companies pay for imported parts, materials, and supplies and make a \u201cvery negative\u201d to a \u201cclose to neutral\u201d impact on their profits and cash flows; they also tend to reduce companies\u2019 values and make M&#038;A deals more dilutive.<\/p>\n","protected":false},"featured_media":0,"template":"","class_list":["post-31250","biws_kb","type-biws_kb","status-publish","hentry","kb_category-ma-and-merger-models"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/31250","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=31250"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}