Merger model
M&A / Merger ModelA model combining acquirer and target financials to work out what the deal does to the acquirer's earnings per share.
Also written: accretion dilution model
A merger model builds the pro forma combined company: add the two income statements, layer in synergies, subtract the costs of financing, adjust for new amortisation from purchase accounting, and divide by the new share count.
The output everyone quotes is accretion or dilution: whether pro forma EPS is higher or lower than the acquirer would have earned standalone. It is the first question a public company board asks, because it is the number the market reacts to.
The mechanics are a comparison of what you pick up against what you give up. Acquired earnings, after tax and after synergies, are set against the after tax cost of the funding used, whether that is forgone interest on cash, interest on new debt, or the earnings yield of newly issued shares.
It is a measure of arithmetic rather than value. A deal can be accretive and destroy value, or dilutive and create it, which is why accretion is the start of the analysis and never the conclusion.
Worked example
An acquirer earning 200 buys a target earning 60, funding half with cash at a 3% after tax return forgone and half with new debt at 5% after tax.
Cash forgone costs 10.8 and interest costs 18, so 28.8 of funding cost against 60 of earnings acquired, plus 12 of after tax synergies.
Pro forma earnings are 243.2 on an unchanged share count, so EPS rises 21.6%. Fund the same deal entirely in stock and the answer changes completely.