If you are preparing for investment banking interviews, the merger model — also called an M&A model or accretion/dilution analysis — is one of the most commonly tested technical concepts at every bank tier. Interviewers use it to see whether you understand how acquisitions actually work financially, not just in theory. This guide explains how a merger model works, walks through each component step by step, and gives you the exact framework to use when a banker asks you to walk through an M&A deal in your interview. Pair this with our Technical Cheatsheet for quick-reference formulas.
What Is a Merger Model?
A merger model is a financial model that analyzes the impact of an acquisition on the acquirer’s earnings per share (EPS). The central question it answers is: after the acquisition, does the combined company’s EPS go up (accretive) or down (dilutive) relative to the acquirer’s standalone EPS?
This matters because EPS is one of the primary metrics public company management teams and boards focus on. An accretive deal is often viewed positively by the market; a dilutive deal requires a compelling strategic rationale to justify. Banks build merger models for every M&A advisory engagement — on both the buy side and sell side — to understand the financial dynamics of a proposed transaction.
Step 1 — Establish the Purchase Price and Deal Structure
Every merger model starts with the same question: how much is the acquirer paying, and how are they paying for it?
Purchase Price
The purchase price is typically expressed as a per-share offer price for the target’s equity, or as an enterprise value. You then calculate the total equity consideration (offer price times diluted shares outstanding) and add any assumed debt to get the total enterprise value of the deal.
Deal Consideration Mix
Acquisitions can be financed with:
- Cash: Paid from the acquirer’s balance sheet or raised through new debt. Cash deals are simpler to model and eliminate share count complexity.
- Stock: The acquirer issues new shares to the target’s shareholders at a fixed exchange ratio. Stock deals are more complex because the acquirer’s share count increases, which affects EPS.
- Mix of cash and stock: Most large M&A deals use a combination.
The deal structure has a massive impact on accretion/dilution. A cash-funded deal avoids share dilution but increases interest expense (because new debt is typically raised). A stock deal avoids incremental interest but dilutes existing shareholders by adding new shares.
Step 2 — Determine the Sources and Uses of Funds
The sources and uses table is a foundational M&A concept that interviewers often test directly. It summarizes where the money is coming from (sources) and where it is going (uses), and the two sides must always balance.
Uses of Funds (What You Are Paying For)
- Equity purchase price (offer price times diluted shares)
- Refinancing of target’s existing debt (if assumed or repaid at close)
- Transaction fees (advisory fees, financing fees, legal costs)
Sources of Funds (Where the Money Comes From)
- Cash on hand (acquirer’s existing cash)
- New debt raised (term loans, bonds)
- New equity issued (stock consideration to target shareholders)
Interviewers frequently ask: “Walk me through a sources and uses table.” If you have not practiced this out loud, it is worth doing before your next interview. Students who go through our coaching process practice these verbal walkthroughs repeatedly until they become second nature.
Step 3 — Model the Combined Income Statement
The heart of the merger model is combining the acquirer’s and target’s income statements to create a pro forma combined income statement. The goal is to calculate the combined company’s net income and EPS after accounting for all deal-related adjustments.
Revenue Combination
Start with the acquirer’s standalone revenue plus the target’s standalone revenue. In the simplest version of the model, this is just an addition. If you are modeling synergies, you add revenue synergies on top (more on this in the next section).
EBITDA and Operating Income
Similarly, combine EBITDA and operating income. Then add cost synergies (which flow through as EBITDA improvements) and subtract any dis-synergies (costs that increase post-merger, like integration expenses).
Deal-Related Adjustments Below EBITDA
This is where the model gets more complex. You need to account for several deal-related income statement adjustments:
- Incremental interest expense: If the deal is partially debt-financed, new interest expense reduces pre-tax income. Use the new debt balance multiplied by the assumed interest rate.
- Interest income lost: If the acquirer used cash on hand, it loses the interest income that cash was generating (typically a small number).
- Amortization of intangibles: In an acquisition, purchase price allocation (PPA) creates intangible assets (brand value, customer relationships, patents) that must be amortized over their useful lives. This non-cash charge reduces pre-tax income.
- Goodwill: Goodwill is not amortized under US GAAP (though it is tested for impairment annually) — so it does not flow through the income statement directly.
Tax Adjustment
Apply the acquirer’s effective tax rate to the combined pre-tax income to get pro forma net income.
Pro Forma EPS
Divide pro forma net income by the pro forma diluted share count. For a cash deal, the share count is just the acquirer’s standalone diluted shares. For a stock deal, you add the new shares issued as consideration.
Step 4 — Calculate Accretion / Dilution
Now you compare:
- Acquirer’s standalone EPS (what EPS would have been without the deal)
- Pro forma combined EPS (EPS after the acquisition)
If pro forma EPS is higher than standalone EPS, the deal is accretive. If it is lower, the deal is dilutive. The percentage difference is the accretion or dilution amount.
Example: If the acquirer’s standalone EPS is $3.00 and the pro forma combined EPS is $3.15, the deal is 5% accretive. If the combined EPS is $2.85, the deal is 5% dilutive.
What Drives Accretion vs. Dilution?
The key insight here — and one interviewers love to probe — is that the deal’s accretion/dilution depends on the relationship between:
- The acquirer’s earnings yield (earnings / price, or the inverse of P/E)
- The after-tax cost of financing (interest rate on debt, or the dilution from new shares)
If the acquirer has a lower P/E than the target, a stock deal tends to be dilutive (because the acquirer is issuing expensive stock — high P/E — to buy cheaper earnings from the target). If the acquirer has a higher P/E than the target, the stock deal tends to be accretive. This is the core logic of the “P/E arbitrage” concept in M&A.
Step 5 — Model Synergies
Synergies are one of the most important — and most commonly discussed — topics in M&A interviews. They represent the additional value created (or cost saved) by combining two companies that would not have been achievable on a standalone basis.
Cost Synergies
Cost synergies reduce the combined company’s expense base. Common sources include:
- Eliminating duplicate headcount (overlapping corporate functions)
- Consolidating office space and facilities
- Combining procurement contracts for better pricing
- Rationalizing overlapping technology systems
Cost synergies are generally more certain and are typically valued in full by the market at the time of deal announcement (subject to a phased realization schedule).
Revenue Synergies
Revenue synergies represent incremental revenue the combined entity can generate by cross-selling, entering new markets, or leveraging the other company’s distribution. They are harder to quantify and less certain, so markets typically give them less credit — often applying a 50% haircut or excluding them from the base case entirely.
How Synergies Affect Accretion/Dilution
Synergies flow directly into the pro forma income statement as incremental EBITDA (cost synergies) or revenue (revenue synergies). They improve pro forma EPS and can flip a dilutive deal to accretive. Interviewers will often ask: “At what level of synergies does this deal become accretive?” — which requires you to solve for the breakeven synergy amount.
How to Walk Through a Merger Model in an Interview
When an interviewer asks you to walk through a merger model, use this framework:
- Start with the purchase price and deal structure. “We begin by determining the total equity consideration and enterprise value, and whether the deal is financed with cash, debt, stock, or a combination.”
- Build the sources and uses. “Then we lay out the sources and uses table to ensure the financing balances.”
- Combine the income statements. “We combine the acquirer’s and target’s standalone income statements, adjusting for incremental interest expense, amortization of intangibles, and synergies.”
- Calculate pro forma EPS. “After applying the acquirer’s tax rate, we divide pro forma net income by pro forma diluted shares to get combined EPS.”
- Compare to standalone EPS. “We compare this to the acquirer’s standalone EPS to determine whether the deal is accretive or dilutive.”
- Discuss the drivers. “The key drivers of accretion/dilution are the purchase price multiple, the financing mix, the cost of debt, and the level of synergies.”
Practice this walkthrough out loud until it flows naturally. You should be able to deliver it in 90 seconds without notes. Our student interviews feature real candidates describing how they prepared for exactly these types of technical deep-dives.
Common Interview Questions on Merger Models
- “Walk me through a merger model.”
- “When would a deal be accretive vs. dilutive?”
- “If the acquirer has a lower P/E than the target and pays 100% stock, is the deal accretive or dilutive?”
- “What is goodwill and how is it created in an acquisition?”
- “What are synergies and how do they flow through the model?”
- “What happens to EPS if you finance an acquisition with all debt vs. all stock?”
If you cannot answer all of these clearly and confidently, you have more preparation to do. Our Free Course covers these concepts in depth, and our Free Resources include practice materials to help you drill them.
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Merger model questions trip up even well-prepared candidates because the concepts are interconnected and the verbal delivery matters as much as the technical knowledge. At Wall Street Mastermind, we run live mock interviews that simulate exactly what you will face at Goldman, Morgan Stanley, Evercore, and other top banks.
If you want to be fully prepared for every technical question that comes your way, apply to work with us. Check out our track record and read what students say on Trustpilot to see what is possible.
