How to Walk Through a Merger Model in an Interview

"Walk me through a merger model" is the M&A cousin of the LBO walkthrough. Interviewers want a sequence: who buys whom, what they pay, how they pay, what earnings look like combined, and whether the deal is accretive. Structure beats cleverness. If you jump to synergies before funding, you sound like a CIM, not a banker.

The 90-second answer

"I start with offer price and equity or enterprise value paid for the target. I set the consideration mix across cash, stock, and debt raised. I build a sources and uses for funding. I combine operating forecasts, add synergies with timing and cost to achieve, account for new interest or share issuance, and compute pro forma EPS versus standalone acquirer EPS to judge accretion or dilution. I sensitize premium, synergies, and mix."

Framework

Offer and premium

State the offer as equity value first when talking stock deals, then bridge to enterprise value if net debt matters for multiples paid. Premium to undisturbed price is the headline; premium to unaffected 30-day VWAP often shows up in fairness materials. In the room, one premium number is enough unless they ask for the bridge.

Consideration mix and funding

Cash deals: new debt and cash on hand fund the equity check; share count stays mostly flat; interest expense rises. Stock deals: shares issued dilute; no new interest from that slice; accretion hinges on relative P/E and synergies. Mix deals need both. Always land sources and uses: purchase equity, refinance target debt if required, fees, and cash to balance sheet if any.

Accretion shortcut reminder

If mostly stock: compare PE of acquirer vs PE paid on target. Paying a higher PE on stock tends to dilute, all else equal. Cash deals hinge on after-tax earnings acquired vs after-tax cost of cash or debt. Full guide: Accretion Dilution. Know break-even synergies as the follow-up.

Synergies without fantasy

Say run-rate versus Year 1. Costs to achieve can make Year 1 dilutive even when steady-state is accretive. That distinction alone clears many screens.

Goodwill (high level)

Purchase price above fair value of net assets creates goodwill. Know it exists; deep PPA is a follow-up (Goodwill and Purchase Accounting). For accretion, amortization of identifiable intangibles can matter if the tax and accounting treatment hits EPS. Ask whether the model assumes purchase accounting amortization or focuses on cash EPS.

Follow-ups to expect

1. Cash vs stock preferences for each side
2. What if synergies slip one year?
3. Break-even synergy to be accretive
4. Control premium vs synergy story
5. What happens to leverage and ratings if cash-funded?

Compare: weak vs strong walkthrough

Mini accretion sketch

Suppose the acquirer earns $5.00 EPS. It buys a target and issues shares so pro forma share count rises 20%. Without synergies, combined net income rises only 10%. Roughly, EPS falls until synergies and any earnings after funding costs close the gap. You do not need perfect numbers in the verbal; you need the bridge: combined NI, funding drag, synergies, share count, then EPS versus standalone.

If the deal is cash-funded, hold share count flat and walk after-tax interest on new debt versus after-tax target earnings. Same destination: pro forma EPS versus standalone.

Stub periods matter too. A mid-year close means Year 1 may include only a partial target contribution. Say whether your accretion is deal-year or first full year. See Stub Periods.

Control premium versus synergy story

Boards ask why shareholders should sell. Your interview answer should separate control premium (what is paid above market) from the synergy case (what the combined firm can earn that neither could alone). If synergies do not clear the premium on a break-even basis, say so. That is the analytical backbone behind break-even synergies and a fairness discussion.

Verbal 30 seconds (tight version)

"Offer value and premium, then consideration mix and sources and uses. Combine the P&Ls, layer synergies with phase-in and costs to achieve, hit new interest or new shares, and compare pro forma EPS to standalone. I sensitize premium, synergies, and cash versus stock."

Practice

Build the verbal, then run Project Harborview. Pair with Cash vs Stock and M&A Synergies.