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
Step 1: Gather Inputs
**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** | |
Step 4: Pro Forma EPS (Accretion / Dilution)
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
