Merger Model & Accretion/Dilution Analysis
A merger model is the financial framework that evaluates how an acquisition impacts the acquirer's earnings per share (EPS). This guide covers how to build robust merger models, analyze accretion/dilution, and evaluate different deal structures and financing scenarios.
What is a Merger Model?
Definition: A merger model is a financial model that combines two companies' financial statements to analyze the impact of an acquisition on the acquirer's pro forma earnings, particularly EPS accretion or dilution.
Core Purpose: Determine whether the transaction is accretive (increases EPS) or dilutive (decreases EPS) to the acquirer's shareholders.
Key Outputs:
- Pro Forma Income Statement - Combined company financials
- Sources & Uses - Deal financing structure
- EPS Impact - Accretion/dilution analysis
- Returns Analysis - IRR and ROIC
- Credit Metrics - Leverage ratios and coverage
💡 Core Truth About Merger Models
While DCF analysis determines what you should pay based on intrinsic value, a merger model tells you what you can pay while maintaining earnings accretion. These are complementary but distinct analyses.
While DCF analysis determines what you should pay based on intrinsic value, a merger model tells you what you can pay while maintaining earnings accretion. These are complementary but distinct analyses.
When to Use Merger Models
Use merger models when:
- Evaluating public company acquisitions
- Acquirer's stock is the primary currency
- Board/shareholders care about EPS impact
- Analyzing alternative financing structures
- Negotiating purchase price and terms
- Modeling earnouts or contingent payments
Critical for:
- Public company M&A
- Large strategic acquisitions
- Stock-heavy deal structures
- Transactions requiring shareholder approval
Merger Model Components
1. The Three Core Sections
💵
Sources & Uses
Transaction Financing
How will the deal be funded? Cash, stock, debt, or combination? Includes purchase price allocation and transaction costs.
📊
Pro Forma Financials
Combined Company
Consolidated income statement, balance sheet, and cash flow statement reflecting the combined entity with purchase accounting adjustments.
📈
Accretion/Dilution
EPS Impact Analysis
Calculate standalone vs. pro forma EPS to determine if the deal is accretive (increases EPS) or dilutive (decreases EPS).
2. Key Assumptions
Every merger model requires:
Transaction Assumptions:
- Purchase price and structure
- Form of consideration (cash, stock, mix)
- Transaction and financing costs
- Expected closing date
- Purchase price allocation
Operating Assumptions:
- Standalone financial projections for both companies
- Revenue synergies (if any)
- Cost synergies and timing
- Integration costs
- Tax rate and structure
Financing Assumptions:
- Debt capacity and terms
- Interest rates and amortization
- Stock price for acquirer
- Exchange ratio (if stock deal)
- New share issuance
Step-by-Step Merger Model Construction
Step 1: Gather Financial Information
For Acquirer:
- Historical financial statements (3-5 years)
- Current share count and treasury stock method details
- Current stock price and trading multiples
- Existing debt schedule and terms
- Current credit metrics and rating
- Standalone financial projections
For Target:
- Historical financial statements
- Quality of earnings (QofE) analysis
- Management projections
- Current capital structure
- Working capital requirements
- Tax attributes (NOLs, basis, etc.)
Example Data Gathering:
ACQUIRER (BuyerCo)
Current Stock Price: $45.00
Shares Outstanding: 100M shares
Market Cap: $4,500M
Current Year EPS: $3.00
Next Year Est. EPS: $3.30
Existing Debt: $500M
TARGET (TargetCo)
Purchase Price: $1,500M
Current Revenue: $400M
Current EBITDA: $80M
Current Net Income: $45M
Existing Debt: $100M
Existing Cash: $50M
Step 2: Build Sources & Uses Table
The Sources & Uses table shows how the transaction is financed.
Uses of Funds (What You're Paying For):
Purchase Equity Value
+ Refinance Target Debt
+ Transaction Fees
+ Financing Fees
= Total Uses
Sources of Funds (How You're Paying):
New Debt
+ Acquirer Stock Issued
+ Cash from Balance Sheet
= Total Sources
Must Balance: Total Sources = Total Uses
Complete Example:
| USES OF FUNDS | $ Millions | % |
|---|---|---|
| Purchase Equity Value | $1,500 | 92.0% |
| Refinance Target Debt | $100 | 6.1% |
| Transaction Fees (2%) | $30 | 1.8% |
| TOTAL USES | $1,630 | 100.0% |
| SOURCES OF FUNDS | $ Millions | % |
|---|---|---|
| New Term Loan | $600 | 36.8% |
| Acquirer Stock (@ $45.00) | $900 | 55.2% |
| Cash from Balance Sheet | $130 | 8.0% |
| TOTAL SOURCES | $1,630 | 100.0% |
Key Calculations:
Enterprise Value = Equity Value + Debt - Cash
= $1,500M + $100M - $50M
= $1,550M
Implied Multiples:
EV / Revenue = $1,550M / $400M = 3.9x
EV / EBITDA = $1,550M / $80M = 19.4x
New Shares Issued = Stock Consideration / Stock Price
= $900M / $45.00 = 20.0M shares
Pro Forma Shares = Acquirer Shares + New Shares
= 100M + 20M = 120M shares
Step 3: Purchase Price Allocation (PPA)
Purchase price allocation determines how the purchase price is allocated on the balance sheet.
Purchase Price Allocation Formula:
Purchase Price
- Fair Value of Net Assets Acquired
= Goodwill
Key Steps:
- Identify Acquired Assets and Liabilities
- Fair Value Adjustments - Revalue to fair market value
- Identify Intangible Assets - Customer relationships, technology, brand
- Calculate Goodwill - Residual amount
Example Purchase Price Allocation:
Purchase Price: $1,500M
NET ASSETS ACQUIRED:
Current Assets $150M
PP&E (at fair value) $200M
Identified Intangibles:
- Customer Relationships (10yr) $250M
- Technology/IP (5yr) $150M
- Trade Names (indefinite) $50M
Current Liabilities ($100M)
Deferred Tax Liability (25% on intangibles) ($112M)
─────────────────────────────────────────────
Fair Value of Net Assets $588M
GOODWILL = $1,500M - $588M = $912M
Tax Impact: Intangibles create deferred tax liability because book basis ≠ tax basis (often not tax deductible)
Step 4: Build Pro Forma Income Statement
Combine both companies' income statements with adjustments.
Pro Forma Adjustments:
- Revenue - Standalone projections + synergies (if applicable)
- Cost Synergies - Cost savings from integration
- D&A - New depreciation/amortization from PPA
- Interest Expense - New debt service
- Share Count - Include new shares issued
Complete Pro Forma Example:
| Pro Forma Income Statement (Year 1) | BuyerCo | TargetCo | Adjustments | Pro Forma |
|---|---|---|---|---|
| Revenue | $2,000 | $400 | — | $2,400 |
| Cost of Revenue | (800) | (200) | — | (1,000) |
| Gross Profit | 1,200 | 200 | — | 1,400 |
| Operating Expenses | (600) | (120) | 30 | (690) |
| Cost Synergies | — | — | +$30M | — |
| D&A | (100) | (20) | (50) | (170) |
| PPA Intangible Amort. | — | — | -$50M | — |
| EBIT | 500 | 60 | (20) | 540 |
| Interest Expense | (25) | (5) | (30) | (60) |
| New Debt Interest @ 5% | — | — | -$30M | — |
| Pre-Tax Income | 475 | 55 | (50) | 480 |
| Taxes @ 25% | (119) | (14) | 13 | (120) |
| Net Income | $356 | $41 | ($37) | $360 |
Key Adjustments Explained:
- Cost Synergies (+$30M): Elimination of redundant roles, facilities, systems
- PPA Amortization (-$50M): New intangible assets amortization
Customer Relationships: $250M / 10 years = $25M/year Technology: $150M / 5 years = $30M/year Total Annual Amortization = $55M (rounded to $50M shown) - New Interest Expense (-$30M): $600M debt × 5.0% = $30M/year
- Tax Benefit (+$13M): Tax shield on incremental interest expense
Step 5: Calculate Accretion/Dilution
The Critical Question: Does the deal increase or decrease EPS?
EPS Calculation:
EPS = Net Income / Weighted Average Shares Outstanding
Accretion/Dilution Formula:
Accretion/(Dilution) % = (Pro Forma EPS - Standalone EPS) / Standalone EPS
Complete Accretion/Dilution Analysis:
| Metric | BuyerCo Standalone | Pro Forma Combined | Change |
|---|---|---|---|
| Net Income ($M) | $356 | $360 | +$4 |
| Shares Outstanding (M) | 100.0 | 120.0 | +20.0 |
| EPS | $3.56 | $3.00 | ($0.56) |
| Accretion/(Dilution) | — | — | (15.7%) |
Interpretation:
Accretion/Dilution = ($3.00 - $3.56) / $3.56 = -15.7%
Result: The deal is 15.7% DILUTIVE in Year 1
⚠️ Dilution is Not Always Bad
A dilutive deal can still create shareholder value if:
• The acquisition becomes accretive in future years
• Strategic value justifies near-term dilution
• Synergies create long-term value exceeding dilution
• Target's growth rate exceeds acquirer's growth rate
A dilutive deal can still create shareholder value if:
• The acquisition becomes accretive in future years
• Strategic value justifies near-term dilution
• Synergies create long-term value exceeding dilution
• Target's growth rate exceeds acquirer's growth rate
Step 6: Multi-Year Accretion/Dilution
Show how accretion/dilution evolves over time as synergies ramp and financing costs are paid down.
Multi-Year Analysis:
| Metric ($M except EPS) | Year 1 | Year 2 | Year 3 |
|---|---|---|---|
| STANDALONE BUYERCO | |||
| Net Income | $356 | $392 | $431 |
| Shares Outstanding | 100.0 | 100.0 | 100.0 |
| Standalone EPS | $3.56 | $3.92 | $4.31 |
| PRO FORMA COMBINED | |||
| Pro Forma Net Income | $360 | $450 | $540 |
| Pro Forma Shares | 120.0 | 120.0 | 120.0 |
| Pro Forma EPS | $3.00 | $3.75 | $4.50 |
| ACCRETION/(DILUTION) ANALYSIS | |||
| EPS Difference | ($0.56) | ($0.17) | $0.19 |
| Accretion/(Dilution) % | (15.7%) | (4.3%) | +4.4% |
Key Insights:
- Year 1: 15.7% dilutive due to high amortization and interest costs
- Year 2: 4.3% dilutive as synergies ramp up
- Year 3: 4.4% accretive as full synergies realized and growth accelerates
Synergy Ramp Assumption:
Year 1: 50% of run-rate synergies ($30M × 50% = $15M realized)
Year 2: 100% of run-rate synergies ($30M fully realized)
Year 3: Full synergies + faster growth from integration
Step 7: Alternative Deal Structures
Model multiple financing scenarios to understand trade-offs.
Scenario Comparison:
| Scenario | All Cash | 50/50 Mix | All Stock |
|---|---|---|---|
| SOURCES ($M) | |||
| Debt | $1,200 | $600 | $0 |
| Stock | $0 | $900 | $1,500 |
| Cash | $430 | $130 | $130 |
| NEW SHARES ISSUED | |||
| New Shares (M) | 0.0 | 20.0 | 33.3 |
| Pro Forma Shares (M) | 100.0 | 120.0 | 133.3 |
| YEAR 1 EPS IMPACT | |||
| Pro Forma Net Income | $307 | $360 | $397 |
| Pro Forma EPS | $3.07 | $3.00 | $2.98 |
| Accretion/(Dilution) | (13.8%) | (15.7%) | (16.3%) |
| CREDIT METRICS | |||
| Total Debt / EBITDA | 6.4x | 3.8x | 1.6x |
| Interest Coverage (EBIT/Int) | 7.3x | 9.0x | 21.6x |
Trade-offs Analysis:
All Cash/Debt:
- ✓ No dilution from new shares
- ✓ Existing shareholders maintain ownership %
- ✗ Highest interest expense drag
- ✗ Leveraged balance sheet
- ✗ Credit rating risk
50/50 Mix (Base Case):
- ✓ Balanced approach
- ✓ Manageable leverage
- ✓ Moderate dilution
- ✗ Some share dilution
- ✗ Some interest expense
All Stock:
- ✓ No debt, pristine balance sheet
- ✓ Preserves financial flexibility
- ✓ Highest net income (no interest)
- ✗ Significant dilution (33% more shares)
- ✗ Ownership dilution for existing shareholders
- ✗ Deal value fluctuates with stock price
Advanced Merger Model Considerations
Treasury Stock Method for Options/RSUs
When calculating pro forma shares, include dilutive securities.
Treasury Stock Method:
Diluted Shares = Options Outstanding - (Options × Strike Price) / Current Price
Example:
10M options outstanding @ $30 strike
Current stock price: $45
Diluted Shares = 10M - (10M × $30) / $45
= 10M - 6.7M
= 3.3M additional shares
Convertible Debt Treatment
If-Converted Method:
- Add back interest expense (after-tax)
- Add converted shares to denominator
Example:
$100M convertible debt @ 3% interest, converts to 2M shares
Add back to numerator: $100M × 3% × (1 - 25% tax) = $2.25M
Add to denominator: 2M shares
Purchase Price True-Up
Model potential purchase price adjustments:
Working Capital Adjustment:
Target Working Capital: $50M
Actual at Close: $47M
Purchase Price Reduction: $3M
Earnout Modeling:
Base Purchase Price: $1,500M
Earnout (Year 2): $100M if EBITDA > $90M
Probability-Weighted: $100M × 70% = $70M
Model as contingent liability, expense over earnout period
Synergy Modeling Deep Dive
Cost Synergies (More certain, faster to realize):
Headcount Reduction
Redundant roles: 150 positions Avg. fully-loaded cost: $150K Annual savings: 150 × $150K = $22.5M Severance cost: 150 × $100K = $15M (one-time)Facility Consolidation
Duplicate offices: 3 locations Annual rent savings: $5M One-time exit costs: $8MTechnology/Vendor Consolidation
Duplicate SaaS subscriptions: $2M/year Professional services savings: $1M/year
Revenue Synergies (Less certain, slower to realize):
Cross-Selling
Target customer base: 5,000 customers Cross-sell rate: 15% Avg. deal size: $50K Year 1 Revenue: 5,000 × 15% × $50K × 50% (ramp) = $18.8M Year 2 Revenue: 5,000 × 15% × $50K = $37.5MProduct Bundling
Price increase from bundle: 10% Affected revenue: $200M Incremental revenue: $20M/year
Synergy Capture Rate:
Year 1 Year 2 Year 3
Cost Synergies 50% 100% 100%
Revenue Syn. 20% 50% 80%
Balance Sheet Modeling
Don't forget the pro forma balance sheet!
Key Line Items:
Assets:
- Cash (post-transaction)
- Working capital (combined)
- PP&E (fair value adjustments)
- Intangible assets (PPA)
- Goodwill
Liabilities:
- New debt balances
- Deferred tax liabilities (from PPA)
- Assumed liabilities
Equity:
- Common stock (par value of new shares)
- APIC (additional paid-in capital)
- Retained earnings
Example Balance Sheet Impact:
Pre-Deal Post-Deal Change
Total Assets $5,000M $7,100M +$2,100M
Total Debt $500M $1,200M +$700M
Shareholders' Equity $4,000M $5,300M +$1,300M
Debt/Equity Ratio 12.5% 22.6% +10.1 pts
Sensitivity Analysis & Scenario Modeling
Model multiple scenarios to understand deal dynamics.
Price Sensitivity
Purchase Price vs. Accretion:
| Purchase Price | $1,300M | $1,400M | $1,500M | $1,600M |
|---|---|---|---|---|
| EV / EBITDA | 16.9x | 18.1x | 19.4x | 20.6x |
| Y1 Accretion | -10.2% | -13.1% | -15.7% | -18.5% |
| Y3 Accretion | +9.1% | +6.5% | +4.4% | +1.8% |
Synergy Sensitivity
Synergies vs. Accretion (Year 3):
Cost Synergies Realized
$20M $30M $40M
Stock Price
$40 -2.1% +4.4% +10.9%
$45 -5.3% +1.2% +7.7%
$50 -8.1% -1.8% +4.7%
Break-Even Analysis
What purchase price makes deal accretion-neutral?
Target Year 1 EPS: $3.56 (standalone)
Pro Forma Shares: 120M
Required Net Income: $3.56 × 120M = $427M
Working backwards:
Required EBITDA: $600M
Less: Target EBITDA: $80M
Implied Max Purchase EBITDA Multiple: ~17.5x
Max Purchase Price: ~$1,400M
Common Merger Model Pitfalls
1. Ignoring Transaction Costs
Problem: Forgetting fees and expenses that reduce net income or increase purchase price
Transaction Costs Include:
- Investment banker fees (1-3% of deal value)
- Legal and accounting fees ($5M-$20M)
- Due diligence costs ($2M-$5M)
- Financing fees (1-2% of debt raised)
- Consent and control change fees
Solution:
- Model all transaction costs explicitly
- Determine if costs are capitalized (added to goodwill) or expensed (reduce NI)
- Most M&A advisory fees are expensed in period incurred
Example Impact:
$1,500M deal
Transaction fees @ 2%: $30M
After-tax impact: $30M × (1 - 25%) = $22.5M hit to Year 1 NI
EPS impact: $22.5M / 120M shares = $0.19/share
2. Incorrect Share Count Calculation
Problem: Using wrong share count or forgetting dilutive securities
Common Mistakes:
- Using basic shares instead of diluted
- Forgetting to add new shares from stock consideration
- Not accounting for treasury stock method on options
- Using wrong weighted average for partial year transactions
Solution:
Pro Forma Shares =
Acquirer Diluted Shares
+ New Shares Issued for Purchase
+ Shares from Assumed Target Options (treasury method)
- Buyback from Cash Proceeds (if applicable)
Partial Year Example:
Deal closes June 30 (mid-year)
Standalone shares: 100M (full year)
New shares: 20M (half year)
Weighted Avg = 100M + (20M × 0.5) = 110M shares
3. Double-Counting or Missing Synergies
Problem: Including synergies incorrectly or missing negative synergies
Common Issues:
- Counting same synergy in multiple categories
- Ignoring costs to achieve synergies
- Forgetting revenue dis-synergies (customer losses)
- Over-estimating timing of realization
Solution:
- Build detailed synergy bridge
- Include integration costs and timeline
- Model negative synergies (customer churn, employee departures)
- Use conservative realization assumptions (50%/100% over 2 years)
Example Synergy Bridge:
Gross Cost Synergies Identified: $40M
- Integration costs (Year 1): ($15M)
- Realization rate (80%): × 80%
Net Cost Synergies: $17M (run-rate)
Revenue Synergies: $25M
- Customer churn: ($5M)
- Delayed realization (Year 1): × 30%
Net Revenue Synergies (Year 1): $6M
4. Wrong Tax Rate
Problem: Using inappropriate tax rate for pro forma entity
Issues:
- Using statutory rate instead of effective rate
- Not adjusting for non-deductible expenses
- Forgetting NOL utilization
- Ignoring international tax considerations
Solution:
- Use effective tax rate from historical financials
- Adjust for one-time items
- Model NOL usage if applicable
- Consider 163(j) interest deduction limitations
Example:
Statutory rate: 21%
State taxes: 4%
Permanent differences: +1%
Effective tax rate: 26%
NOT 21%!
5. Incorrect PPA Treatment
Problem: Wrong amortization periods or missing deferred tax impact
Common Errors:
- Amortizing goodwill (not allowed under GAAP)
- Using wrong useful lives for intangibles
- Forgetting deferred tax liability on intangibles
- Not adjusting D&A in future years
Solution:
Intangible Asset Amount Life Annual Amort
Customer Relationships $250M 10yr $25M
Technology/IP $150M 5yr $30M
Trade Names $50M Indef $0
Goodwill $912M Indef $0
Total PPA Amortization: $55M/year
Deferred Tax Liability = ($250M + $150M) × 25% = $100M
(Reduces net assets acquired, increases goodwill)
6. Forgetting Balance Sheet Impact
Problem: Only modeling P&L, ignoring B/S and credit metrics
Solution:
- Model pro forma balance sheet
- Calculate leverage ratios (Debt/EBITDA)
- Calculate coverage ratios (EBIT/Interest)
- Ensure compliance with debt covenants
- Consider rating agency impact
7. Static Stock Price Assumption
Problem: Not stress-testing impact of stock price changes on deal value
For Stock Deals:
- Deal value fluctuates with stock price
- Fixed exchange ratio vs. fixed value collar
- Impact on accretion/dilution
Solution: Model multiple stock price scenarios
Example:
Fixed exchange ratio: 0.5 shares per target share
Target shares: 30M
Fixed shares issued: 15M
Acquirer Stock Price Deal Value Impact
$40 $600M Underpay
$45 $675M Base
$50 $750M Overpay
Consider collar: 0.45 - 0.55 ratio based on $40-$50 range
Best Practices
1. Build a Flexible Model
Model Architecture:
- Separate assumptions tab (all inputs in one place)
- Scenario dropdowns for different cases
- Data validation and error checks
- Clear color coding (blue = input, black = formula)
Key Toggles:
Purchase Price: $1,500M
Stock/Cash Mix: 60% / 40%
Synergy Realization: 50% / 100% (Y1/Y2)
Closing Date: Q2 2025
Tax Rate: 25%
2. Multiple Scenarios and Sensitivities
Build Three Core Cases:
- Base Case: Most likely scenario
- Upside Case: Optimistic but achievable
- Downside Case: Conservative scenario
Key Sensitivities:
- Purchase price (±10-20%)
- Stock price (±20%)
- Synergies (50%-150% of plan)
- Growth rates
- Financing costs
3. Link to Strategic Rationale
Beyond the Numbers:
- Why does deal make strategic sense?
- How does valuation compare to standalone DCF?
- What's the walk from DCF value to offer price?
- What are the key value creation drivers?
Strategic Value Bridge:
DCF Standalone Value: $1,200M
+ Control Premium (20%): $240M
+ PV of Cost Synergies: $180M
+ PV of Revenue Synergies: $120M
+ Strategic/Platform Value: $100M
─────────────────────────────────
Justifiable Price: $1,840M
Actual Offer: $1,500M
Margin of Safety: $340M (23%)
4. Credit and Leverage Analysis
Key Metrics to Track:
| Metric | Investment Grade Target | High Yield Target |
|---|---|---|
| Debt / EBITDA | < 3.0x | < 5.0x |
| EBIT / Interest | >> 5.0x | >> 3.0x |
| Debt / Total Cap | < 40% | < 60% |
| FCF / Debt | > 20% | > 10% |
5. Football Field Valuation Summary
Present merger model results alongside other valuation methods:
Valuation Method Low Mid High
─────────────────────────────────────────────────────
DCF Analysis $1,200 $1,350 $1,500
Comparable Companies $1,150 $1,300 $1,450
Precedent Transactions $1,300 $1,450 $1,600
─────────────────────────────────────────────────────
Implied Range $1,150 $1,367 $1,517
Management Target $1,500
Control Premium 15.8%
6. Returns Analysis
Calculate returns metrics beyond accretion/dilution:
Internal Rate of Return (IRR):
Year 0: Purchase Price ($1,500M)
Year 1-5: Annual FCF $100M - $180M
Year 5: Exit Value $2,100M (14x EBITDA)
IRR = 18.5%
Return on Invested Capital (ROIC):
ROIC = NOPAT / Invested Capital
Year 3 ROIC:
NOPAT: $85M
Invested Capital: $1,500M
ROIC = $85M / $1,500M = 5.7%
Target: Exceed WACC (typically 8-12%)
7. Risk-Adjusted Analysis
Probability-Weight Scenarios:
Prob EPS Weighted
Base Case 50% $3.00 $1.50
Upside 25% $3.75 $0.94
Downside 25% $2.40 $0.60
─────────────────────────────────────────
Expected EPS $3.04
Standalone EPS: $3.56
Expected Dilution: -14.6%
8. Board Presentation Framework
Key Slides for Board:
- Transaction Overview - Price, structure, rationale
- Strategic Fit - Why this deal, why now
- Valuation Summary - Football field
- Sources & Uses - Deal financing
- Financial Impact - Accretion/dilution
- Sensitivities - Key risk factors
- Synergy Bridge - Cost and revenue synergies
- Integration Plan - Timeline and risks
- Alternatives - Why not other targets
- Recommendation - Go/no-go with clear logic
Real-World Merger Model Example
Case Study: TechAcquirer buys CloudTarget
Deal Parameters
TechAcquirer (Buyer):
Current Stock Price: $85.00
Shares Outstanding: 500M
Market Cap: $42.5B
LTM Revenue: $10.0B
LTM EBITDA: $2.5B
LTM Net Income: $1.5B
Current EPS: $3.00
P/E Ratio: 28.3x
CloudTarget (Target):
Purchase Price: $5.0B
LTM Revenue: $800M
LTM EBITDA: $160M
LTM Net Income: $85M
Existing Debt: $200M
Cash: $100M
Deal Structure
| Sources & Uses | $ Millions |
|---|---|
| USES | |
| Purchase Equity Value | $5,000 |
| Refinance Target Debt | $200 |
| Transaction Fees (2%) | $100 |
| Total Uses | $5,300 |
| SOURCES | |
| Stock (70% @ $85.00) | $3,710 |
| New Term Loan (30%) | $1,590 |
| Total Sources | $5,300 |
New Shares Issued: $3,710M / $85.00 = 43.6M shares
Pro Forma Shares: 500M + 43.6M = 543.6M shares
Accretion/Dilution Analysis
Year 1 Pro Forma:
TechAcquirer Standalone NI: $1,500M
CloudTarget NI: $85M
Combined Pre-Synergies: $1,585M
Adjustments:
- PPA Amortization ($800M/8yr) ($100M)
- New Interest @ 5.0% ($80M)
+ Cost Synergies (50% realized) $60M
- Transaction Costs ($75M)
+ Tax Benefit @ 25% $49M
═══════════════════════════════════════
Pro Forma Net Income: $1,439M
Pro Forma EPS = $1,439M / 543.6M = $2.65
Standalone EPS: $3.00
Pro Forma EPS: $2.65
Accretion/(Dilution): -11.7% DILUTIVE
Year 3 Pro Forma (Full Synergies):
Pro Forma Net Income: $1,950M
Pro Forma Shares: 543.6M
Pro Forma EPS: $3.59
Standalone EPS (projected): $3.50
Accretion: +2.6% ACCRETIVE
Conclusion: Deal is dilutive in Year 1 but becomes accretive by Year 3 as synergies fully realize.
Full Merger Model Template
This section provides a complete, production-ready merger model template that can be used as-is for mid-market and large company M&A transactions. Copy this template into Excel and customize the inputs for your specific deal.
SECTION 1: Transaction Assumptions & Inputs
Use this section for all deal-specific inputs. Keep all assumptions in one place for easy scenario analysis.
═══════════════════════════════════════════════════════════════
MERGER MODEL INPUTS
═══════════════════════════════════════════════════════════════
TRANSACTION OVERVIEW
───────────────────────────────────────────────────────────────
Deal Announcement Date: [MM/DD/YYYY]
Expected Close Date: [MM/DD/YYYY]
Transaction Structure: [Stock/Cash/Mixed]
Target Company Name: [TargetCo]
Acquirer Company Name: [AcquirerCo]
PURCHASE PRICE & CONSIDERATION
───────────────────────────────────────────────────────────────
Purchase Equity Value ($M): $1,500
Premium to Current Price: 25.0%
Premium to 30-Day VWAP: 22.5%
Form of Consideration:
% Cash: 40.0%
% Stock: 60.0%
Total: 100.0%
Cash Consideration ($M): $600
Stock Consideration ($M): $900
IMPLIED VALUATION MULTIPLES
───────────────────────────────────────────────────────────────
Target LTM Revenue ($M): $400
Target LTM EBITDA ($M): $80
Target LTM EBIT ($M): $60
Target Net Debt ($M): $50
(Debt $100M - Cash $50M)
Enterprise Value ($M): $1,550
(Equity Value $1,500 + Net Debt $50)
EV / LTM Revenue: 3.9x
EV / LTM EBITDA: 19.4x
EV / LTM EBIT: 25.8x
P / LTM Net Income ($45M): 33.3x
ACQUIRER INFORMATION
───────────────────────────────────────────────────────────────
Current Stock Price: $45.00
Shares Outstanding - Basic (M): 100.0
Treasury Stock Options (M): 5.0
Diluted Shares Outstanding (M): 103.0
Market Capitalization ($M): $4,500
Current Year Est. EPS: $3.00
Next Year Est. EPS: $3.30
Current P/E Ratio: 15.0x
Existing Total Debt ($M): $500
Existing Cash ($M): $300
Net Debt ($M): $200
TARGET INFORMATION
───────────────────────────────────────────────────────────────
Target Shares Outstanding (M): 30.0
Implied Price per Share: $50.00
Pre-Announcement Price: $40.00
Target Existing Debt ($M): $100
Target Cash ($M): $50
Target Net Debt ($M): $50
FINANCING ASSUMPTIONS
───────────────────────────────────────────────────────────────
New Debt Issuance ($M): $600
Revolver Draw ($M): $0
Term Loan A ($M): $400
Term Loan B ($M): $200
Senior Notes ($M): $0
Weighted Average Cost of Debt: 5.00%
Revolver Rate: 4.50%
Term Loan A Rate: 4.75%
Term Loan B Rate: 5.50%
Senior Notes Rate: 5.25%
Target Debt to Refinance ($M): $100
Cash from Balance Sheet ($M): $130
New Stock Issuance:
Dollar Amount ($M): $900
Stock Price for Issuance: $45.00
New Shares Issued (M): 20.0
Pro Forma Shares Outstanding (M): 123.0
TRANSACTION COSTS & FEES
───────────────────────────────────────────────────────────────
M&A Advisory Fees (% of Equity Value): 2.0%
M&A Advisory Fees ($M): $30.0
Legal & Accounting ($M): $15.0
Due Diligence Costs ($M): $3.0
Financing Fees (% of Debt): 1.5%
Financing Fees ($M): $9.0
Other Transaction Costs ($M): $3.0
Total Transaction Costs ($M): $60.0
Treatment of Transaction Costs:
Expensed in Current Period: $48.0
Capitalized (Debt Fees): $9.0
Seller-Paid Fees: $3.0
TAX ASSUMPTIONS
───────────────────────────────────────────────────────────────
Acquirer Effective Tax Rate: 25.0%
Target Effective Tax Rate: 25.0%
Pro Forma Tax Rate: 25.0%
Tax Structure: [Taxable/Tax-Free]
Target NOLs ($M): $0
Annual NOL Limitation (§382): $0
SYNERGY ASSUMPTIONS
───────────────────────────────────────────────────────────────
COST SYNERGIES (Run-Rate):
Headcount Reduction:
Positions Eliminated: 150
Avg. Fully-Loaded Cost ($K): $150
Annual Savings ($M): $22.5
Facility Consolidation ($M): $5.0
Vendor/Technology Consolidation ($M): $3.0
Other Operating Expense Savings ($M): $2.5
Total Run-Rate Cost Synergies ($M): $33.0
Cost Synergy Realization:
Year 1 (% of run-rate): 50%
Year 2 (% of run-rate): 100%
Year 3+ (% of run-rate): 100%
One-Time Costs to Achieve:
Severance ($M): $15.0
Facility Exit Costs ($M): $8.0
System Integration ($M): $12.0
Other Integration Costs ($M): $5.0
Total Integration Costs ($M): $40.0
Integration Cost Timing:
Year 1: 75%
Year 2: 25%
REVENUE SYNERGIES (Run-Rate):
Cross-Selling Revenue ($M): $15.0
Product Bundling Uplift ($M): $8.0
Market Expansion ($M): $5.0
Total Run-Rate Revenue Synergies ($M): $28.0
Revenue Synergy Realization:
Year 1 (% of run-rate): 20%
Year 2 (% of run-rate): 50%
Year 3 (% of run-rate): 80%
Year 4+ (% of run-rate): 100%
Incremental Margin on Revenue Synergies: 60%
DIS-SYNERGIES:
Customer Churn ($M): $10.0
Key Employee Departures Impact ($M): $5.0
Total Dis-Synergies ($M): $15.0
WACC / DISCOUNT RATE ASSUMPTIONS
───────────────────────────────────────────────────────────────
Risk-Free Rate (10Y Treasury): 4.0%
Beta (Levered): 1.2
Market Risk Premium: 5.5%
Size Premium: 2.0%
Cost of Equity: 12.6%
= Rf + (Beta × MRP) + Size Premium
= 4.0% + (1.2 × 5.5%) + 2.0%
After-Tax Cost of Debt: 3.75%
= 5.0% × (1 - 25%)
Target Capital Structure:
Debt / (Debt + Equity): 20%
Equity / (Debt + Equity): 80%
WACC: 11.1%
= (80% × 12.6%) + (20% × 3.75%)
SECTION 2: Sources & Uses of Funds
═══════════════════════════════════════════════════════════════
SOURCES & USES
═══════════════════════════════════════════════════════════════
USES OF FUNDS $M % of Total
───────────────────────────────────────────────────────────────
Purchase Target Equity $1,500 92.0%
Repay/Refinance Target Debt $100 6.1%
Transaction Fees & Expenses $30 1.8%
Financing Fees $0 0.0%
─────────────────────
TOTAL USES $1,630 100.0%
SOURCES OF FUNDS $M % of Total
───────────────────────────────────────────────────────────────
New Term Loan $600 36.8%
Acquirer Stock Issued $900 55.2%
Cash from Balance Sheet $130 8.0%
Revolver Draw $0 0.0%
─────────────────────
TOTAL SOURCES $1,630 100.0%
Check (must = $0): $0 ✓
TRANSACTION SUMMARY METRICS
───────────────────────────────────────────────────────────────
Total Transaction Value ($M): $1,630
Enterprise Value ($M): $1,550
Equity Value ($M): $1,500
Net Debt Assumed ($M): $50
Purchase Price per Target Share: $50.00
Target Shares Acquired (M): 30.0
Premium Paid:
vs. Unaffected Price ($40): 25.0%
vs. 30-Day VWAP ($41): 22.0%
vs. 52-Week High ($48): 4.2%
New Acquirer Shares Issued (M): 20.0
Exchange Ratio (per target share): 0.667x
Fixed Collar Range: $42 - $48
Pro Forma Ownership:
Existing Acquirer Shareholders: 83.7%
Former Target Shareholders: 16.3%
SECTION 3: Purchase Price Allocation (PPA)
═══════════════════════════════════════════════════════════════
PURCHASE PRICE ALLOCATION (PPA)
═══════════════════════════════════════════════════════════════
PURCHASE PRICE $M
───────────────────────────────────────────────────────────────
Total Consideration Paid $1,500
LESS: FAIR VALUE OF NET ASSETS ACQUIRED
───────────────────────────────────────────────────────────────
ASSETS:
Current Assets:
Cash & Equivalents $50
Accounts Receivable $60
Inventory $30
Other Current Assets $10
Total Current Assets $150
Fixed Assets (PP&E):
Book Value $150
Fair Value Step-Up $50
Fair Value of PP&E $200
Identified Intangible Assets:
Customer Relationships
Fair Value $250
Useful Life (years) 10
Annual Amortization $25
Developed Technology/IP
Fair Value $150
Useful Life (years) 5
Annual Amortization $30
Trade Names & Trademarks
Fair Value $50
Useful Life Indefinite
Annual Amortization $0
Non-Compete Agreements
Fair Value $20
Useful Life (years) 3
Annual Amortization $7
Total Identified Intangibles $470
Total Annual Amortization $62
Other Assets $10
TOTAL ASSETS ACQUIRED $830
LIABILITIES:
Current Liabilities:
Accounts Payable $50
Accrued Expenses $30
Deferred Revenue $20
Total Current Liabilities ($100)
Long-Term Liabilities:
Deferred Tax Liability (on intangibles)
Tax Rate 25%
Taxable Intangibles $470
DTL Created ($118)
Other Long-Term Liabilities ($10)
TOTAL LIABILITIES ASSUMED ($228)
NET ASSETS ACQUIRED (Fair Value) $602
GOODWILL CALCULATION
───────────────────────────────────────────────────────────────
Purchase Price $1,500
Less: Fair Value of Net Assets ($602)
──────
GOODWILL $898
Goodwill as % of Purchase Price: 59.9%
ANNUAL AMORTIZATION EXPENSE SCHEDULE
───────────────────────────────────────────────────────────────
Y1 Y2 Y3 Y4 Y5 Total
Customer Relationships $25 $25 $25 $25 $25 $125
Technology/IP $30 $30 $30 $30 $30 $150
Trade Names $0 $0 $0 $0 $0 $0
Non-Compete $7 $7 $7 $0 $0 $20
─────────────────────────────────────
Total PPA Amortization $62 $62 $62 $55 $55 $295
Note: Goodwill and indefinite-lived intangibles are not
amortized but subject to annual impairment testing.
SECTION 4: Pro Forma Income Statement (5-Year Projection)
═══════════════════════════════════════════════════════════════════════════════════════
PRO FORMA INCOME STATEMENT
═══════════════════════════════════════════════════════════════════════════════════════
($M except per share data) LTM Year 1 Year 2 Year 3 Year 4 Year 5
───────────────────────────────────────────────────────────────────────────────────────
ACQUIRER STANDALONE
Revenue $2,000 $2,200 $2,420 $2,662 $2,928 $3,221
% Growth — 10.0% 10.0% 10.0% 10.0% 10.0%
COGS (800) (880) (968) (1,065) (1,171) (1,288)
Gross Profit 1,200 1,320 1,452 1,597 1,757 1,933
Gross Margin % 60.0% 60.0% 60.0% 60.0% 60.0% 60.0%
Operating Expenses (600) (638) (665) (692) (721) (750)
D&A (100) (110) (121) (133) (146) (161)
EBIT 500 572 666 772 890 1,022
EBIT Margin % 25.0% 26.0% 27.5% 29.0% 30.4% 31.7%
Interest Expense (25) (25) (25) (24) (23) (22)
Pre-Tax Income 475 547 641 748 867 1,000
Taxes @ 25% (119) (137) (160) (187) (217) (250)
Net Income $356 $410 $481 $561 $650 $750
Diluted Shares (M) 103.0 103.0 103.0 103.0 103.0 103.0
EPS - Standalone $3.46 $3.98 $4.67 $5.45 $6.31 $7.28
───────────────────────────────────────────────────────────────────────────────────────
TARGET STANDALONE
Revenue $400 $460 $529 $608 $699 $804
% Growth — 15.0% 15.0% 15.0% 15.0% 15.0%
COGS (200) (230) (265) (304) (350) (402)
Gross Profit 200 230 264 304 349 402
Gross Margin % 50.0% 50.0% 50.0% 50.0% 50.0% 50.0%
Operating Expenses (120) (129) (138) (146) (154) (161)
D&A (20) (21) (22) (23) (24) (25)
EBIT 60 80 104 135 171 216
EBIT Margin % 15.0% 17.4% 19.7% 22.2% 24.5% 26.9%
Interest Expense (5) (5) (5) (5) (5) (5)
Pre-Tax Income 55 75 99 130 166 211
Taxes @ 25% (14) (19) (25) (33) (42) (53)
Net Income $41 $56 $74 $98 $125 $158
───────────────────────────────────────────────────────────────────────────────────────
PRO FORMA ADJUSTMENTS
PPA Amortization — (62) (62) (62) (55) (55)
New Interest Expense — (30) (30) (29) (28) (27)
Eliminate Target Interest — 5 5 5 5 5
Cost Synergies Realized — 17 33 33 33 33
Revenue Synergies (60% margin) — 3 8 13 17 17
Dis-Synergies — (15) (8) (3) 0 0
Integration Costs — (30) (10) 0 0 0
Transaction Costs (expensed) — (48) 0 0 0 0
Tax Impact of Adjustments @ 25% — 30 16 11 8 7
Total Pro Forma Adjustments — (130) (48) (32) (20) (20)
───────────────────────────────────────────────────────────────────────────────────────
PRO FORMA COMBINED
Revenue $2,400 $2,660 $2,949 $3,270 $3,627 $4,025
% Growth YoY — 10.8% 10.9% 10.9% 10.9% 11.0%
Combined Gross Profit 1,400 1,550 1,716 1,901 2,106 2,335
Gross Margin % 58.3% 58.3% 58.2% 58.1% 58.1% 58.0%
Combined Operating Expenses (720) (750) (775) (805) (842) (878)
Combined D&A (120) (131) (143) (156) (170) (186)
PPA Amortization — (62) (62) (62) (55) (55)
Cost Synergies — 17 33 33 33 33
Integration Costs — (30) (10) 0 0 0
Pro Forma EBIT 560 594 759 911 1,072 1,249
EBIT Margin % 23.3% 22.3% 25.7% 27.9% 29.6% 31.0%
Pro Forma Interest Expense (30) (50) (50) (48) (46) (44)
Pro Forma Pre-Tax Income 530 544 709 863 1,026 1,205
Pro Forma Taxes @ 25% (133) (136) (177) (216) (257) (301)
PRO FORMA NET INCOME $397 $408 $532 $647 $770 $904
Pro Forma Diluted Shares (M) 123.0 123.0 123.0 123.0 123.0 123.0
PRO FORMA EPS $3.23 $3.32 $4.33 $5.26 $6.26 $7.35
───────────────────────────────────────────────────────────────────────────────────────
ACCRETION / (DILUTION) ANALYSIS
Standalone EPS $3.46 $3.98 $4.67 $5.45 $6.31 $7.28
Pro Forma EPS $3.23 $3.32 $4.33 $5.26 $6.26 $7.35
Difference ($0.23) ($0.66) ($0.34) ($0.19) ($0.05) $0.07
Accretion / (Dilution) % (6.6%) (16.6%) (7.3%) (3.5%) (0.8%) 1.0%
Status DILUTIVE DILUTIVE DILUTIVE DILUTIVE DILUTIVE ACCRETIVE
SECTION 5: Pro Forma Balance Sheet
═══════════════════════════════════════════════════════════════
PRO FORMA BALANCE SHEET (Post-Close)
═══════════════════════════════════════════════════════════════
($M) Acquirer Target Adj. Pro Forma
───────────────────────────────────────────────────────────────
ASSETS
Current Assets:
Cash & Equivalents $300 $50 ($170) $180
Accounts Receivable 400 60 0 460
Inventory 200 30 0 230
Other Current Assets 100 10 0 110
Total Current Assets 1,000 150 (170) 980
Fixed Assets (PP&E):
Gross PP&E 2,000 150 50 2,200
Accumulated Depreciation (800) 0 0 (800)
Net PP&E 1,200 150 50 1,400
Intangible Assets:
Customer Relationships 0 0 250 250
Technology/IP 0 0 150 150
Trade Names 0 0 50 50
Non-Compete 0 0 20 20
Total Intangibles 0 0 470 470
Goodwill 500 0 898 1,398
Other Assets 100 10 0 110
TOTAL ASSETS $2,800 $310 $1,248 $4,358
───────────────────────────────────────────────────────────────
LIABILITIES
Current Liabilities:
Accounts Payable $200 $50 $0 $250
Accrued Expenses 150 30 0 180
Short-Term Debt 50 0 0 50
Deferred Revenue 0 20 0 20
Total Current Liabilities 400 100 0 500
Long-Term Debt:
Existing Acquirer Debt 450 0 0 450
Target Debt (refinanced) 0 100 (100) 0
New Debt 0 0 600 600
Total Long-Term Debt 450 100 500 1,050
Deferred Tax Liability 100 0 118 218
Other Liabilities 50 10 0 60
TOTAL LIABILITIES $1,000 $210 $518 $1,728
───────────────────────────────────────────────────────────────
SHAREHOLDERS' EQUITY
Common Stock (par) $10 $3 $2 $12
Additional Paid-In Capital 600 37 898 1,535
Retained Earnings 1,190 60 (170) 1,080
Treasury Stock 0 0 0 0
TOTAL EQUITY $1,800 $100 $730 $2,630
TOTAL LIABILITIES & EQUITY $2,800 $310 $1,248 $4,358
───────────────────────────────────────────────────────────────
KEY BALANCE SHEET METRICS
Total Debt $1,100
Cash $180
Net Debt $920
Book Value of Equity $2,630
Shares Outstanding (M) 123.0
Book Value per Share $21.38
Debt / Equity 41.8%
Debt / Total Capitalization 29.5%
SECTION 6: Credit Metrics & Leverage Analysis
═══════════════════════════════════════════════════════════════
CREDIT METRICS ANALYSIS
═══════════════════════════════════════════════════════════════
Year 1 Year 2 Year 3 Year 4 Year 5
───────────────────────────────────────────────────────────────────────────
EBITDA CALCULATION
Pro Forma EBIT $594 $759 $911 $1,072 $1,249
+ Pro Forma D&A 193 205 218 225 241
Pro Forma EBITDA $787 $964 $1,129 $1,297 $1,490
DEBT SCHEDULE
Beginning Debt Balance $1,100 $1,045 $985 $920 $850
Mandatory Amortization (50) (55) (60) (65) (70)
Optional Prepayment (5) (5) (5) (5) (5)
Ending Debt Balance $1,045 $985 $920 $850 $775
Average Debt $1,073 $1,015 $953 $885 $813
Interest Expense @ 5.0% $50 $50 $48 $46 $44
LEVERAGE RATIOS
Total Debt / EBITDA 1.3x 1.0x 0.8x 0.7x 0.5x
Net Debt / EBITDA 1.2x 0.9x 0.7x 0.5x 0.4x
Target Covenant: < 3.5x ✓ ✓ ✓ ✓ ✓
COVERAGE RATIOS
EBITDA / Interest 15.7x 19.3x 23.5x 28.2x 33.9x
EBIT / Interest 11.9x 15.2x 19.0x 23.3x 28.4x
(EBITDA - Capex) / Interest 13.1x 16.5x 20.3x 24.7x 29.9x
Target Covenant: >> 3.0x ✓ ✓ ✓ ✓ ✓
FREE CASH FLOW METRICS
EBITDA $787 $964 $1,129 $1,297 $1,490
- Cash Interest (50) (50) (48) (46) (44)
- Cash Taxes (136) (177) (216) (257) (301)
- Capex (132) (145) (163) (181) (201)
- Change in NWC (15) (18) (20) (23) (25)
Unlevered Free Cash Flow $454 $574 $682 $790 $919
- Debt Amortization (55) (60) (65) (70) (75)
Levered Free Cash Flow $399 $514 $617 $720 $844
FCF / Total Debt 38.2% 52.2% 67.1% 84.7% 108.9%
FCF Yield on Purchase Price 26.6% 34.3% 41.1% 48.0% 56.3%
RETURNS METRICS
ROIC (Unlevered):
NOPAT $446 $570 $684 $804 $937
Invested Capital $1,500 $1,500 $1,500 $1,500 $1,500
ROIC 29.7% 38.0% 45.6% 53.6% 62.5%
ROE:
Net Income $408 $532 $647 $770 $904
Avg. Shareholders' Equity $2,215 $2,630 $2,630 $2,630 $2,630
ROE 18.4% 20.2% 24.6% 29.3% 34.4%
SECTION 7: Sensitivity Analysis Tables
═══════════════════════════════════════════════════════════════
SENSITIVITY ANALYSIS
═══════════════════════════════════════════════════════════════
TABLE 1: PURCHASE PRICE vs. ACCRETION (Year 1)
───────────────────────────────────────────────────────────────
Purchase Price ($M)
Stock/Cash Mix $1,300 $1,400 $1,500 $1,600 $1,700
─────────────────────────────────────────────────────────────
100% Stock (8.2%) (11.5%) (14.9%) (18.1%) (21.2%)
75% Stock (9.5%) (12.9%) (16.3%) (19.6%) (22.8%)
50% Stock (11.1%) (14.6%) (18.0%) (21.3%) (24.6%)
25% Stock (13.2%) (16.8%) (20.3%) (23.7%) (27.0%)
100% Cash (16.8%) (20.5%) (24.1%) (27.6%) (31.0%)
Note: All-stock less dilutive short-term, but all-cash preserves
future upside for existing shareholders
TABLE 2: SYNERGIES vs. YEAR 3 ACCRETION
───────────────────────────────────────────────────────────────
Cost Synergies Realized ($M)
Revenue Syn. $20 $30 $40 $50 $60
─────────────────────────────────────────────────────────────
$0 (12.1%) (7.3%) (2.5%) 2.3% 7.1%
$15 (9.8%) (5.0%) (0.2%) 4.6% 9.4%
$30 (7.5%) (2.7%) 2.1% 6.9% 11.7%
$45 (5.2%) (0.4%) 4.4% 9.2% 14.0%
$60 (2.9%) 1.9% 6.7% 11.5% 16.3%
Base Case Assumptions: $33M cost synergies, $28M revenue synergies
TABLE 3: ACQUIRER STOCK PRICE vs. YEAR 1 ACCRETION
───────────────────────────────────────────────────────────────
Acquirer Stock Price at Close
% Stock Used $35 $40 $45 $50 $55
─────────────────────────────────────────────────────────────
40% (14.2%) (15.1%) (16.6%) (18.5%) (20.8%)
50% (13.8%) (14.8%) (16.3%) (18.2%) (20.5%)
60% (13.3%) (14.4%) (15.9%) (17.9%) (20.2%)
70% (12.9%) (14.0%) (15.6%) (17.5%) (19.9%)
80% (12.4%) (13.6%) (15.2%) (17.2%) (19.5%)
Lower stock price = More shares issued = More dilution
Higher stock price = Fewer shares issued = Less dilution
TABLE 4: INTEGRATION COSTS vs. NET SYNERGIES (NPV)
───────────────────────────────────────────────────────────────
Integration Costs ($M)
Synergies $25 $35 $45 $55 $65
─────────────────────────────────────────────────────────────
$50 Run-Rate $208 $198 $188 $178 $168
$60 Run-Rate $258 $248 $238 $228 $218
$70 Run-Rate $308 $298 $288 $278 $268
$80 Run-Rate $358 $348 $338 $328 $318
$90 Run-Rate $408 $398 $388 $378 $368
NPV = PV of synergies over 5 years @ 11% WACC - Integration Costs
Base Case: $61M run-rate synergies, $40M integration costs = $238M NPV
TABLE 5: BREAK-EVEN ANALYSIS
───────────────────────────────────────────────────────────────
To achieve Year 1 EPS accretion-neutral ($3.98):
OPTION 1: Reduce Purchase Price
Maximum EV: $1,285M
Implied EBITDA Multiple: 16.1x
Current Offer: 19.4x
Required Discount: 17%
OPTION 2: Increase Synergies
Required Additional Cost Synergies: $52M (vs. $33M base)
Increase Required: 58%
OPTION 3: Change Financing Mix
Required % Cash (vs. 40% base): 72%
Additional Debt Required: $480M
Pro Forma Leverage: 4.1x (vs. 1.3x base)
OPTION 4: Combination Approach
Purchase Price: $1,400M (-7%)
Cost Synergies: $42M (+27%)
% Cash: 50% (+10pp)
Result: ~0% Y1 Accretion
SECTION 8: Alternative Deal Structure Scenarios
═══════════════════════════════════════════════════════════════
DEAL STRUCTURE COMPARISON
═══════════════════════════════════════════════════════════════
Scenario A Scenario B Scenario C
All Stock 50/50 Mix All Cash
───────────────────────────────────────────────────────────────
DEAL TERMS
Purchase Price ($M) $1,500 $1,500 $1,500
Stock Consideration 100% 50% 0%
Cash Consideration 0% 50% 100%
FINANCING
New Debt ($M) $100 $850 $1,600
Stock Issued ($M) $1,500 $750 $0
Cash Used ($M) $30 $30 $30
New Shares Issued (M) 33.3 16.7 0.0
Pro Forma Shares (M) 136.3 119.7 103.0
YEAR 1 FINANCIALS
Pro Forma EBIT $594 $594 $594
Interest Expense (10) (48) (88)
EBT 584 546 506
Taxes @ 25% (146) (137) (127)
Net Income $438 $410 $380
EPS $3.21 $3.42 $3.69
Standalone EPS $3.98 $3.98 $3.98
Accretion/(Dilution) (19.3%) (14.1%) (7.3%)
YEAR 3 FINANCIALS
Pro Forma EBIT $911 $911 $911
Interest Expense (8) (43) (78)
EBT 903 868 833
Net Income $677 $651 $625
EPS $4.97 $5.44 $6.07
Standalone EPS $5.45 $5.45 $5.45
Accretion/(Dilution) (8.8%) (0.2%) 11.4%
CREDIT METRICS (Year 1)
Total Debt $600 $1,350 $2,100
EBITDA $787 $787 $787
Debt / EBITDA 0.8x 1.7x 2.7x
EBIT / Interest 59.4x 12.4x 6.8x
Rating Implication AA A BBB+
Cost of Debt 4.00% 5.00% 6.00%
STRATEGIC CONSIDERATIONS
─────────────────────────────────────────────────────────────
Scenario A (All Stock):
✓ Minimal debt, pristine balance sheet
✓ Maximum financial flexibility
✓ Aligns incentives (target shareholders stay invested)
✗ Significant dilution (25% more shares)
✗ Deal value fluctuates with stock price
✗ Most dilutive to existing shareholders
Scenario B (50/50 Mix):
✓ Balanced approach
✓ Moderate leverage
✓ Manageable dilution (16% more shares)
✓ Maintains investment grade rating
≈ Moderate risk/return profile
Scenario C (All Cash):
✓ No share dilution
✓ Fixed deal value
✓ Highest near-term EPS (lowest share count)
✗ High leverage (2.7x)
✗ Constrains financial flexibility
✗ Higher interest burden
✗ May require asset sales or equity raise later
RECOMMENDATION: Scenario B (50/50 Mix) offers best balance
SECTION 9: Deal Summary Dashboard
═══════════════════════════════════════════════════════════════
EXECUTIVE SUMMARY METRICS
═══════════════════════════════════════════════════════════════
TRANSACTION OVERVIEW
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Target Company: TargetCo
Purchase Price: $1,500M
Enterprise Value: $1,550M
Financing: 60% Stock / 40% Debt+Cash
Expected Close: Q2 2025
VALUATION
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EV / LTM Revenue: 3.9x
EV / LTM EBITDA: 19.4x
EV / LTM EBIT: 25.8x
Premium to Market Price: 25.0%
Benchmark Median Multiples:
Public Comps EV/EBITDA: 17.5x [Above]
Recent M&A EV/EBITDA: 18.2x [Above]
STRATEGIC RATIONALE
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1. Expand addressable market by $2.5B
2. Accelerate product roadmap by 18-24 months
3. Gain 350 enterprise customers
4. Achieve #1 or #2 market position in 3 verticals
5. Realize $61M annual run-rate synergies
FINANCIAL IMPACT (Year 1 → Year 3)
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Year 1 Year 3
Revenue $2,660M $3,270M
Growth Rate 10.8% 10.9%
EBITDA $787M $1,129M
Margin 29.6% 34.5%
EPS (Pro Forma) $3.32 $5.26
Accretion/(Dilution) (16.6%) (3.5%)
Free Cash Flow $399M $617M
FCF Yield 26.6% 41.1%
RETURNS ANALYSIS
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5-Year IRR on Investment: 17.8%
Year 3 ROIC: 45.6%
Year 5 ROIC: 62.5%
Payback Period (undiscounted): 3.2 years
NPV of Synergies (@ 11% WACC): $238M
NPV of Deal (vs. $1,500M price): Positive if synergies >> 85%
RISK FACTORS & MITIGANTS
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Risk Mitigation
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Integration complexity Dedicated PMO team, 100-day plan
Customer churn (10% modeled) Retention bonuses, customer success
Key talent retention Stay bonuses for top 50 employees
Synergy realization (85% prob) Conservative phasing, external advisors
Regulatory approval Pre-filing with FTC, clean Hart-Scott
CREDIT PROFILE
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Pro Forma Debt / EBITDA: 1.3x
Interest Coverage: 15.7x
Pro Forma Rating: A (Stable)
Covenant Headroom:
Max Leverage (3.5x): 2.2x headroom ✓
Min Interest Coverage (3.0x): 12.7x headroom ✓
GOVERNANCE & APPROVALS
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Board Approval Required: Yes (>$1B transaction)
Shareholder Vote Required: Yes (>20% dilution)
Regulatory Approvals: Hart-Scott-Rodino (HSR)
Expected Vote Support: 75%+ (based on investor calls)
GO / NO-GO DECISION CRITERIA
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Criterion Target Actual Status
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EV/EBITDA < 20x <20x 19.4x ✓ PASS
Year 3 Accretive >>0% (3.5%) ✗ MISS
Debt/EBITDA < 2.5x <2.5x 1.3x ✓ PASS
ROIC > WACC by Year 3 >>11% 45.6% ✓ PASS
Synergy NPV > $200M >>$200M $238M ✓ PASS
Strategic Fit Score >>8/10 9/10 ✓ PASS
Integration Risk Medium Medium ✓ PASS
Overall Assessment: PROCEED
(6 of 7 pass)
SECTION 10: Model Usage Instructions
📋 How to Use This Template
Step 1: Input Collection
Fill in all blue-highlighted cells in Section 1 (Transaction Assumptions). Ensure you have:
• Audited financials for both companies (3 years historical)
• Management projections
• Current stock prices and share counts
• Debt terms and schedules
• Quality of earnings adjustments
Step 2: PPA Development
Work with external valuation firm or accounting team to:
• Identify all intangible assets
• Determine fair values
• Assign useful lives
• Calculate deferred tax impacts
Step 3: Synergy Validation
Build bottom-up synergy analysis:
• Interview functional leaders (HR, IT, Facilities, Ops)
• Get specific headcount reduction lists
• Model revenue synergies conservatively
• Account for dis-synergies (churn, disruption)
• Estimate integration costs and timing
Step 4: Scenario Analysis
Build 3 cases (Base, Upside, Downside):
• Vary key assumptions (growth, synergies, price)
• Stress test financing structures
• Run sensitivities on critical variables
• Calculate break-even thresholds
Step 5: Validation & Review
Before presenting:
• Verify all formulas link correctly
• Check that balance sheet balances
• Confirm sources = uses
• Review reasonableness of all metrics
• Compare to comparable transactions
• Prepare answers to obvious objections
Common Checks
✓ Pro forma shares = Acquirer shares + New shares issued
✓ PPA intangibles + Goodwill = Purchase price - Fair value of net assets
✓ Interest expense = Average debt × Interest rate
✓ Taxes = Pre-tax income × Effective tax rate
✓ Cash flow statement ties to balance sheet changes
✓ All percentages sum to 100% where applicable
✓ No #REF, #DIV/0, or #VALUE errors
Model Maintenance Best Practices
Version Control:
- Save dated versions (MergerModel_2025-01-30_v1.xlsx)
- Track major assumption changes in change log
- Use Excel's "Track Changes" for collaborative reviews
- Maintain separate tabs for each scenario
Documentation:
- Add comments to all key assumption cells
- Document data sources (where did this number come from?)
- Explain any unusual adjustments
- Keep supporting schedules organized
Flexibility:
- Use named ranges for key inputs
- Build dropdown menus for scenarios
- Color code: Blue = Input, Black = Formula, Green = Link
- Avoid hard-coding; use cell references
Presentation:
- Keep output tabs clean and print-friendly
- Use conditional formatting for quick insights
- Build executive summary dashboard
- Create board-ready charts and graphs
Updates:
- Refresh model as new information arrives
- Update market data (stock prices, interest rates) daily during active negotiations
- Adjust synergies based on due diligence findings
- Revise timing assumptions as integration planning progresses
References
- Rosenbaum & Pearl - Investment Banking: Valuation, LBOs, M&A, and IPOs
- M&A Modeling - Wall Street Prep
- Accretion/Dilution Analysis - Corporate Finance Institute
- Purchase Price Allocation - Deloitte M&A Accounting Guide
- Merger Consequences - McKinsey on M&A
- ASC 805 Business Combinations - FASB
- Credit Metrics for M&A - S&P Global Ratings
- Merger Model Best Practices - EY M&A Valuations
Last updated: Wed Jan 29 2025 19:00:00 GMT-0500 (Eastern Standard Time)