Mergers and acquisitions are a core part of investment banking. When a company is buying or selling another business, the financial model is central to analyzing the transaction. M&A models are used to estimate the financial impact of the deal — including whether it adds value to shareholders, how it affects earnings, and what financing is required.
This article explains how a basic M&A model works, how it’s structured, and what bankers look for when testing and presenting transaction scenarios.
What an M&A Model Is Designed to Show
An M&A model evaluates the financial effect of combining two companies. It focuses on:
- The combined company’s pro forma financials
- The effect on earnings per share (EPS)
- Synergies and cost savings
- Purchase price and consideration (cash, stock, or debt)
- Changes in capital structure
The most common type is an accretion/dilution model, which shows how the deal impacts the buyer’s EPS — a key metric in deal negotiations and investor communication.
Core Structure of an M&A Model
The model usually includes the following components:
- Assumptions tab — purchase price, offer structure, synergies, deal expenses
- Buyer and seller standalone financials — usually based on forecasted or latest twelve-month data
- Pro forma adjustments — to reflect synergies, financing, and accounting entries
- Pro forma income statement — showing combined earnings
- Accretion/dilution output — comparing buyer’s EPS before and after the deal
The goal is to make the structure easy to follow so that the effects of every assumption are transparent.
Purchase Price and Consideration
The model starts by calculating the total purchase price — usually a premium to the target’s share price or a negotiated valuation based on EBITDA, revenue, or precedent transactions.
Next, the deal consideration is broken down:
- Cash — paid directly, requires cash on hand or new debt
- Stock — new shares issued to target shareholders
- Debt — may involve issuing new bonds or loans to fund the deal
The mix of consideration affects the buyer’s ownership, interest expense, and dilution.
Modeling Synergies and Cost Savings
Synergies are a key part of most strategic deals. These include:
- Cost synergies — like reducing duplicate overhead or consolidating facilities
- Revenue synergies — such as cross-selling or geographic expansion
In the model, cost synergies are typically added as a reduction to SG&A or COGS. Revenue synergies are harder to forecast and often excluded unless well supported. The model should allow users to toggle synergies on or off and adjust timing and ramp-up.
Pro Forma Adjustments and Income Statement
To build the pro forma financials, the model:
- Adds the buyer’s and seller’s income statements
- Subtracts the seller’s standalone interest income
- Adds incremental interest expense on new debt (if used)
- Adjusts for synergies, amortization of intangibles, and deal costs
- Applies the buyer’s tax rate (or a blended rate)
This results in the pro forma net income, which is used to calculate EPS after the deal.
Accretion / Dilution Analysis
Accretion/dilution compares the buyer’s earnings per share before and after the transaction:
EPS Impact = (Pro Forma Net Income) / (Pro Forma Share Count) – Standalone Buyer EPS
- If EPS increases, the deal is accretive
- If EPS decreases, the deal is dilutive
Bankers test different structures and synergy levels to find the range of outcomes. Even small changes in assumptions can shift a deal from dilutive to accretive.
This output is a key discussion point with management and investors — and often shown in investor presentations, pitch books, and fairness opinions.
Financing and Capital Structure
If the deal involves new debt or equity, the model includes:
- A debt schedule for interest and repayments
- A pro forma balance sheet to show the updated capital structure
- Debt covenants or leverage ratio analysis (for larger deals)
The financing structure affects both the risk profile and valuation of the combined company, so it must be modeled carefully.
Purchase Accounting (Advanced Models)
More detailed M&A models include purchase accounting adjustments:
- Revaluing assets and liabilities of the target
- Creating goodwill or other intangibles
- Amortizing identifiable intangibles over time
- Adjusting deferred taxes
These entries affect depreciation, amortization, and tax calculations. Many quick models skip this level of detail unless the deal is live or public.
Closing Thought
An M&A model is built to answer one question: does this deal create value? It does this by combining two sets of financials, layering in synergies, and testing the impact on earnings and ownership. When structured clearly and tested properly, the model becomes a decision-making tool — for the deal team, the board, and the market.