Merger Model

Step 1: Project standalone financials for both acquirer and target. Step 2: Determine deal terms — offer price, consideration mix (cash vs. stock), and financing laid out in the sources & uses table. Step 3: Calculate purchase price allocation adjustments (goodwill, intangibles write-up, deferred tax effects). Step 4: Combine income statements and apply synergies, new interest expense, and share issuance. Step 5: Calculate pro forma EPS and compare to acquirer's standalone EPS.

A deal is accretive when pro forma EPS > acquirer standalone EPS. Key drivers: the target's P/E relative to the acquirer's P/E (buying a lower-P/E target with stock is accretive), the cost of financing (debt is cheap, so cash/debt deals are often accretive), synergies (cost savings boost combined earnings), and the purchase premium (higher premium = more dilutive). Accretion/dilution is a necessary but not sufficient condition for a good deal.

Synergies — typically cost synergies (headcount, facilities, systems) — are added to the combined income statement. Revenue synergies are rarer and harder to justify. Purchase accounting creates goodwill (excess of purchase price over fair value of net assets) and may write up intangible assets (customer relationships, technology), creating new amortization expense that reduces pro forma earnings.