Walk Me Through a Merger Model

Start with the target's equity value: offer price per share = current share price + a control premium (typically ~20-40%). Multiply by diluted shares to get the offer equity value. State it cleanly: 'Say we offer a 30% premium to acquire the target.' This is the consideration the acquirer must fund.

The acquirer funds the deal with some combination of cash on hand, new debt, and newly issued stock. The mix matters enormously for accretion/dilution because each source has a different 'cost': cash forgoes interest income (low cost), new debt adds interest expense (after-tax cost of debt), and new stock dilutes the share count (cost of equity, usually the most expensive). A simple rule of thumb: cash and debt-funded deals tend to be accretive when the acquirer's cost of cash/debt is below the target's earnings yield; all-stock deals are accretive when the acquirer's P/E is higher than the target's P/E (it's buying cheaper earnings with expensive shares).

Add the two companies' pre-tax incomes (or EBIT), then layer the deal adjustments: subtract new interest expense from debt raised, subtract foregone interest income on cash used, add after-tax synergies if assumed, and subtract incremental D&A from any asset write-up and intangibles created in purchase price allocation. Tax-effect the combined pre-tax income to get pro forma net income. (Goodwill itself isn't amortized, but written-up tangible assets and finite-life intangibles create new D&A that hits earnings.)

New share count = acquirer's existing shares + any new shares issued to fund the stock portion. Pro forma EPS = combined net income ÷ new share count. Compare to the acquirer's standalone EPS: if higher, the deal is accretive; if lower, dilutive. Bankers also compute the breakeven synergies (the synergy level needed to make a dilutive deal neutral) and the premium the buyer can afford. Accretion/dilution is a 'first screen' on whether a deal makes financial sense — it's not a measure of value creation, but boards and analysts watch it closely.

Expect: 'What makes a deal accretive vs dilutive?' (compare cost of financing to the yield on what you're buying; for all-stock, compare P/E multiples). 'Why might a company do a dilutive deal anyway?' (strategic value, synergies that build over time, defensive consolidation, EPS isn't everything). 'What's the impact of synergies?' (after-tax cost/revenue synergies flow straight to combined net income and push toward accretion).