M&A and Merger Models

IB · M&A / merger models

Purchase price, funding mix, goodwill, synergies, and accretion / dilution.

Walk through a merger model

What a merger model answers

A merger (accretion / dilution) model asks: after buying the target, will the acquirer's earnings per share go up or down? Public acquirers care because investors track EPS, and the model also shows ownership, credit metrics and how much synergy the deal needs.

How to answer in an interview

Concord's word-for-word interview answer for “Walk through a merger model”, plus the full lesson and graded practice.

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Merger model: sources and uses to pro forma EPScanvas

Drawing diagram…

Set the purchase price (offer price times target diluted shares, plus refinanced debt and fees) and fund it in sources and uses with cash, new debt or new acquirer stock. Cash costs forgone interest income, debt costs after-tax interest, and stock costs extra shares, with a cost equal to one over the acquirer's P/E. The purchase price allocation writes up assets and records goodwill, and write-ups create extra D&A. Pro forma net income is both companies' net income plus after-tax synergies minus these costs; divide by pro forma shares and compare with the acquirer's standalone EPS to see whether the deal is accretive or dilutive.

Common pitfall

Define every term before you calculate. Most wrong answers here start with a fuzzy definition, not bad arithmetic.

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