Merger Model
description: Build accretion/dilution analysis for M&A
transactions. Models pro forma EPS impact, synergy sensitivities, and
purchase price allocation. Use when evaluating a potential acquisition,
preparing merger consequences analysis for a pitch, or advising on deal
terms. Triggers on "merger model", "accretion dilution", "M&A
model", "pro forma EPS", "merger consequences", or "deal impact
analysis".
Workflow
Acquirer:
- Company name, current share price, shares outstanding
- LTM and NTM EPS (GAAP and adjusted)
- P/E multiple
- Pre-tax cost of debt, tax rate
- Cash on balance sheet, existing debt
Target:
- Company name, current share price, shares outstanding (if
public)
- LTM and NTM EPS or net income
- Enterprise value or equity value
Deal Terms:
- Offer price per share (or premium to current)
- Consideration mix: % cash vs. % stock
- New debt raised to fund cash portion
- Expected synergies (revenue and cost) and phase-in timeline
- Transaction fees and financing costs
- Expected close date
Step 2: Purchase Price
Analysis
| Item |
Value |
| Offer price per share |
|
| Premium to current |
|
| Equity value |
|
| Plus: net debt assumed |
|
| Enterprise value |
|
| EV / EBITDA implied |
|
| P/E implied |
|
Step 3: Sources & Uses
| Sources |
$ |
Uses |
$ |
| New debt |
|
Equity purchase price |
|
| Cash on hand |
|
Refinance target debt |
|
| New equity issued |
|
Transaction fees |
|
|
|
Financing fees |
|
| Total |
|
Total |
|
Calculate year-by-year (Year 1-3):
|
Standalone |
Pro Forma |
Accretion/(Dilution) |
| Acquirer net income |
|
|
|
| Target net income |
|
|
|
| Synergies (after tax) |
|
|
|
| Foregone interest on cash (after tax) |
|
|
|
| New debt interest (after tax) |
|
|
|
| Intangible amortization (after tax) |
|
|
|
| Pro forma net income |
|
|
|
| Pro forma shares |
|
|
|
| Pro forma EPS |
|
|
|
| Accretion / (Dilution) % |
|
|
|
Step 5: Sensitivity Analysis
Accretion/Dilution vs. Synergies and Offer
Premium:
|
$0M syn |
$25M syn |
$50M syn |
$75M syn |
$100M syn |
| 15% premium |
|
|
|
|
|
| 20% premium |
|
|
|
|
|
| 25% premium |
|
|
|
|
|
| 30% premium |
|
|
|
|
|
Accretion/Dilution vs. Cash/Stock Mix:
|
100% cash |
75/25 |
50/50 |
25/75 |
100% stock |
| Year 1 |
|
|
|
|
|
| Year 2 |
|
|
|
|
|
Step 6: Breakeven Synergies
Calculate the minimum synergies needed for the deal to be EPS-neutral
in Year 1.
Step 7: Output
- Excel workbook with:
- Assumptions tab
- Sources & uses
- Pro forma income statement
- Accretion/dilution summary
- Sensitivity tables
- Breakeven analysis
- One-page merger consequences summary for pitch book
Important Notes
- Always show both GAAP and adjusted (cash) EPS where relevant
- Stock deals: use acquirer's current price for exchange ratio, note
dilution from new shares
- Include purchase price allocation — goodwill and intangible
amortization matter for GAAP EPS
- Synergy phase-in is critical — Year 1 is often only 25-50% of
run-rate synergies
- Don't forget foregone interest income on cash used and new interest
expense on debt raised
- Tax rate on synergies and interest adjustments should match the
acquirer's marginal rate