Walk Me Through a Merger Model: The Interview Answer, Step by Step (With Numbers)

"Walk me through a merger model" is one of the most common technical questions in investment banking interviews. The good news is that the answer has a clear structure, and once you understand it, you can deliver it confidently in about a minute.

This post gives you a ready-to-use answer, explains each step in plain English, and then runs through a full numerical example so you understand what's going on underneath. Interviewers love follow-up questions, and the example is what will get you through them.

The Short Answer You Can Say in an Interview

Here's a clean version you can adapt:

"In a merger model, you combine two companies' financials to see how a deal affects the buyer, most importantly its earnings per share. First, you project the income statements of the buyer and the target. Then you make assumptions about the deal: the purchase price, the premium, and how it's paid for, whether cash, debt, stock, or a mix. Next, you calculate the purchase price allocation, which creates goodwill and often asset write-ups. Then you combine the income statements and adjust for the deal effects: lost interest on cash used, new interest expense on debt raised, extra depreciation and amortization from write-ups, and any synergies. Finally, you divide pro forma net income by the new share count, including any shares issued, and compare that pro forma EPS to the buyer's standalone EPS to see whether the deal is accretive or dilutive."

That's it. Now let's unpack it so you actually own it.

Step by Step: What Each Part Means

1. Project Both Companies' Financials

You start with standalone projections for the buyer (acquirer) and the target, usually focusing on the income statement over the next few years.

The key outputs you need are each company's net income and the buyer's share count and EPS. Everything later in the model gets compared against the buyer's standalone EPS.

2. Set the Deal Assumptions

This is where you decide what the deal actually looks like:

• Purchase price: usually the target's current share price plus a control premium (often somewhere in the 20% to 40% range for public targets, though it varies a lot by deal).
• Form of consideration: cash on hand, new debt, new stock, or a mix.
• Financing terms: interest rate on new debt, interest earned on cash, and the buyer's share price (which sets how many new shares get issued).
• Other items: synergies, transaction fees, and financing fees.

3. Build Sources and Uses

Uses are what the money pays for: buying the target's equity, refinancing its debt (if applicable), and fees. Sources are where the money comes from: cash, debt, and stock.

The two sides must match. This table is a great sanity check and a common interview topic on its own.

4. Allocate the Purchase Price

When the buyer pays more than the target's book value, the excess has to go somewhere on the balance sheet:

• First, assets like PP&E and intangibles can be written up to fair value.
• Whatever is left over becomes goodwill.

Why this matters for EPS: written-up assets create extra depreciation and amortization, which lowers pro forma net income. Goodwill, on the other hand, isn't amortized under US GAAP for public companies. It's tested for impairment instead.

5. Combine the Income Statements and Make Adjustments

Add the buyer's and target's net income together, then adjust for everything the deal changes. On an after-tax basis, the main adjustments are:

• Minus interest income lost on cash used
• Minus interest expense on new debt
• Minus extra D&A from asset write-ups
• Plus synergies (cost savings or revenue gains)
• Minus amortization of financing fees, if you're modeling them

6. Calculate Pro Forma EPS and Accretion/Dilution

Pro forma EPS equals pro forma net income divided by pro forma shares (buyer's existing shares plus any new shares issued).

• If pro forma EPS beats the buyer's standalone EPS, the deal is accretive.
• If it's lower, the deal is dilutive.

Many models also combine the balance sheets to check credit metrics like leverage, but for the interview answer, the income statement and EPS are the core.

A Worked Example With Real Numbers

Let's make this concrete. Assume a 25% tax rate throughout.

The Buyer

• Net income: $500M
• Shares outstanding: 100M
• Share price: $60
• EPS: $500M / 100M = $5.00
• P/E: $60 / $5.00 = 12x

The Target

• Net income: $100M
• Shares outstanding: 20M
• Share price: $40 (market cap of $800M)

The Deal Terms

• 25% premium, so the offer is $50 per share
• Equity purchase price: $50 × 20M = $1,000M
• That implies the buyer is paying 10x the target's earnings ($1,000M / $100M)
• Funding: 50% new debt ($500M at 6%) and 50% new stock ($500M)
• Asset write-ups create $20M of extra pre-tax D&A per year
• No synergies, to keep it simple

The Adjustments

New shares issued: $500M / $60 = 8.33M shares

After-tax interest on new debt: $500M × 6% = $30M pre-tax, × (1 − 25%) = $22.5M

After-tax extra D&A: $20M × (1 − 25%) = $15M

Pro Forma EPS

Compared with standalone EPS of $5.00, the deal is about 3.8% accretive.

The Shortcut Interviewers Love: Cost of Acquisition vs. Target Yield

You won't always have time to build a table, so learn this rule of thumb. Compare what the buyer "pays" for its funding to the earnings yield it's buying.

• Cost of debt (after tax): 6% × (1 − 25%) = 4.5%
• Cost of stock: the buyer's earnings yield, which is 1 / P/E = 1 / 12 = 8.3%
• Cost of cash: the after-tax interest income you give up
• Target's yield: 1 / purchase P/E = 1 / 10 = 10%

In our deal, the weighted cost is 50% × 4.5% + 50% × 8.3% ≈ 6.4%. That's below the target's 10% yield, so the deal is accretive before write-ups. The extra D&A eats into that, but not enough to flip it.

The All-Stock Version

For an all-stock deal, the rule gets even simpler: if the buyer's P/E is higher than the P/E it pays for the target, the deal is accretive (ignoring synergies and write-ups).

Quick check with our numbers: issuing $1,000M of stock at $60 means 16.67M new shares. Ignoring write-ups, pro forma EPS is $600M / 116.67M = $5.14, which is accretive. That makes sense, since the buyer trades at 12x and pays 10x.

Common Follow-Up Questions

Be ready for these, because they usually come right after your walkthrough:

• "Why might a buyer do a dilutive deal?" Because EPS isn't everything. Strategic value, long-term growth, or synergies that take time to show up can justify short-term dilution.
• "How much in synergies would make this deal break even?" Find the EPS gap, multiply by pro forma shares to get the net income shortfall, then gross it up for taxes.
• "Why use debt instead of stock?" Debt is often cheaper on an after-tax basis, but it adds leverage and risk. Stock avoids that but spreads earnings over more shares.
• "Does accretive mean the deal creates value?" Not necessarily. A deal can boost EPS while overpaying relative to what the target is really worth.

Mistakes That Cost Candidates Points

• Forgetting taxes on interest, D&A, and synergies. Every income statement adjustment should be after tax.
• Skipping the new shares in the denominator. This is the most common way to get the wrong answer in a stock deal.
• Saying goodwill is amortized. For US public companies, it isn't. It's tested for impairment.
• Rambling. Hit the steps in order, keep it around a minute, and let the interviewer pull you into details.

The Bottom Line

A merger model answers one question: what happens to the buyer's EPS after the deal? Project both companies, set the deal terms, allocate the purchase price, combine and adjust the income statements, then compare pro forma EPS with standalone EPS.

Practice the short answer out loud until it feels natural, then rework the example above with your own numbers. If you can explain why a deal is accretive, not just that it is, you'll stand out from most candidates in the room.