What Is a Merger Model?
A merger model, sometimes called an M&A model or accretion/dilution model, projects the combined financial statements of two companies after an acquisition. It answers the questions a board actually asks: what the deal costs, how it will be financed, what the combined company earns, and whether the acquirer's earnings per share go up or down as a result.
The model sits at the center of sell-side and buy-side M&A work. Bankers use it to test different purchase prices and financing mixes, to run ability-to-pay analyses showing the maximum price an acquirer can offer before a deal turns dilutive, and to support the numbers that appear in board presentations and fairness opinions.
How a Merger Model Is Built
The model starts with transaction assumptions, most importantly the offer price and premium along with the mix of cash, stock, and debt used to fund it. A sources and uses table lays out where the money comes from and where it goes, including refinanced target debt and transaction fees. Purchase price allocation then writes the target's assets up to fair value and records the excess purchase price as goodwill.
From there the analyst combines the two income statements, layering in after-tax interest on new debt, foregone interest on cash used, incremental amortization of written-up intangibles, and expected synergies. Dividing pro forma net income by the pro forma share count, which reflects any new shares issued to the target, produces combined EPS to compare against the acquirer's standalone figure.
Why Merger Models Matter
Deal announcements for public acquirers almost always state the expected EPS impact, and those figures come straight out of a merger model. Sensitivity tables showing accretion or dilution across a range of prices and synergy assumptions help negotiators understand how much room they have, which makes the model a live tool during a deal rather than a one-time exhibit.
For candidates recruiting into investment banking or private equity, the merger model is one of the four standard modeling tests alongside the DCF, the LBO model, and comparable company analysis. Interviewers expect a clean walkthrough of the mechanics, the drivers of accretion, and the limitations, especially the point that an accretive deal is not automatically a good deal.
