Merger Model
Definition
A merger model (M&A model) projects the pro forma financials of an acquirer after buying a target. Core steps: determine the purchase price and consideration mix (cash, debt, stock), calculate sources and uses of funds, combine the income statements, layer in deal adjustments, and compute pro forma EPS versus standalone EPS to measure accretion/dilution.
Deal adjustments include new interest expense on acquisition debt, foregone interest income on cash used, incremental amortization of written-up intangibles (and sometimes depreciation from PP&E write-ups), after-tax synergies, transaction and financing fees, and new shares issued. Balance sheet adjustments create goodwill and write up target assets via purchase price allocation.
More advanced versions also analyze contribution (each party's share of revenue/EBITDA/net income versus its ownership of the combined company), pro forma credit metrics, and breakeven synergies — the synergies needed to make the deal EPS-neutral.
Why interviewers ask
"Walk me through a merger model" is a staple M&A group question. Interviewers probe the order of operations (sources and uses first), the specific EPS adjustments, and how goodwill is created. Being fluent here signals you can actually do the analyst job.
Related terms
Interviews don't test definitions — they test recall under pressure.
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