Contribution Analysis
Investment Banking glossary · M&A & LBO Modeling Dynamics
Definition
Sanity-check used primarily in stock-for-stock mergers: compares each company's percentage contribution to combined revenue, EBITDA, and net income against the ownership split implied by the exchange ratio. If the target contributes 35% of EBITDA but receives only 25% of pro forma ownership, the exchange ratio favors the acquirer. Market-neutral check on fairness of the exchange ratio.
Contribution Analysis in plain English
Contribution Analysis is a fairness check used when two companies merge by swapping stock instead of cash — it asks, 'Is each side getting an ownership stake that matches what it actually brings to the table?' You compare how much of the combined revenue, profit, and earnings each company contributes against how much of the merged company its shareholders will own. If the target supplies 35% of the profits but its shareholders only end up owning 25% of the new combined company, the deal is tilted in the buyer's favor. It's like two friends starting a food truck together: if one puts in 35% of the money and effort, they'd better own about 35% of the truck — anything less and they're getting shortchanged.
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