merger-model

Business

M&A deal modeling: accretion/dilution analysis, LBO models, DCF valuation, comparable company analysis, precedent transactions, and synergy estimation. Full three-statement merger models.

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Overview

A merger model estimates the financial impact of an acquisition or merger: purchase price, financing mix, pro forma statements, synergies, accretion/dilution, leverage, and returns. Use it for M&A analysis, not just valuation in isolation.

When to Use

Use this skill when:

evaluating whether a deal is accretive or dilutive,
comparing stock vs cash vs mixed consideration,
building a simple LBO/strategic deal screen,
estimating synergy sensitivity,
or drafting the structure for a full M&A model.

Core model sections

A proper merger model usually includes:

transaction assumptions
purchase price / enterprise value
financing sources and uses
purchase accounting adjustments
pro forma income statement
share count bridge
accretion/dilution analysis
leverage and coverage metrics
sensitivity tables

Basic accretion / dilution calculation

def accretion_dilution(acquirer_net_income, target_net_income,
                       acquirer_shares, new_shares_issued,
                       after_tax_synergies=0.0):
    pro_forma_income = acquirer_net_income + target_net_income + after_tax_synergies
    pro_forma_shares = acquirer_shares + new_shares_issued
    base_eps = acquirer_net_income / acquirer_shares
    pro_forma_eps = pro_forma_income / pro_forma_shares
    accretion_pct = (pro_forma_eps / base_eps - 1) * 100
    return {
        'base_eps': round(base_eps, 4),
        'pro_forma_eps': round(pro_forma_eps, 4),
        'accretion_pct': round(accretion_pct, 2),
    }

print(accretion_dilution(
    acquirer_net_income=900,
    target_net_income=220,
    acquirer_shares=300,
    new_shares_issued=50,
    after_tax_synergies=40,
))

Sources and uses pattern

Uses:
- equity purchase price
- debt repayment / assumption
- fees and expenses

Sources:
- cash on balance sheet
- new debt
- stock issuance

Always reconcile sources == uses.

LBO-style screen example

def rough_lbo_irr(entry_ebitda, entry_multiple, debt_pct, ebitda_growth, exit_multiple, years):
    entry_ev = entry_ebitda * entry_multiple
    debt = entry_ev * debt_pct
    equity = entry_ev - debt
    exit_ebitda = entry_ebitda * ((1 + ebitda_growth) ** years)
    remaining_debt = debt * 0.65  # simple placeholder assumption
    exit_ev = exit_ebitda * exit_multiple
    exit_equity = exit_ev - remaining_debt
    irr = (exit_equity / equity) ** (1 / years) - 1
    return round(irr * 100, 2)

Minimum real-world checks

Is the target EV/EBITDA multiple plausible vs comps?
Are synergies cost, revenue, or both?
Are synergies pre-tax or after-tax?
Is financing realistic at current rates and leverage levels?
Does the model include fees, integration costs, and stock-based comp effects?
Are share issuance and treasury method assumptions explicit?

Common failure modes

counting synergies with no timing ramp
mixing EBITDA, EBIT, and net income carelessly
forgetting transaction fees
using enterprise value where equity value is needed
assuming all synergies are immediate and fully realizable
treating accretion as proof of strategic quality