When two companies merge, the deal doesn't just change ownership — it changes the numbers on both companies' income statements the moment it closes. A merger consequences model (also called a merger model or an accretion/dilution model) is the tool bankers and corporate development teams use to answer one specific question: once you combine the acquirer and the target, and account for how the deal is financed, does the acquirer end up better or worse off on a per-share basis?

What a Merger Consequences Model Actually Combines

At its core, the model takes three separate financial pictures and merges them into one pro forma company:

  • The acquirer's standalone net income and share count
  • The target's standalone net income
  • The financing impact of the deal itself — new debt, foregone interest income, new shares issued, and any synergies

That last piece is where most of the analytical work happens. Two deals with the identical purchase price can produce completely different outcomes depending on how the acquirer pays for the target.

The Key Assumptions That Drive the Output

Before any numbers get combined, a merger model needs a handful of assumptions locked down:

  • Consideration mix — how much of the purchase price is paid in cash versus acquirer stock. This single input determines both how much new debt (and therefore interest expense) the deal requires, and how many new shares get issued.
  • Financing cost — the interest rate on any new debt raised to fund the cash portion, and the tax rate used to compute the after-tax cost of that debt.
  • Synergies — the pre-tax cost or revenue synergies management expects, always converted to an after-tax figure before it hits combined net income.
  • Purchase accounting adjustments — in a full model, incremental depreciation and amortization from asset step-ups, though simplified versions often assume these away to isolate the core mechanics.

What the Output Tells You

The headline output is pro forma EPS — the combined company's net income divided by its new, larger share count — compared against the acquirer's standalone EPS. If pro forma EPS is higher than standalone EPS, the deal is accretive; if it's lower, the deal is dilutive. This is the number that shows up in the press release and the first line of every sell-side analyst's reaction note.

But EPS accretion is a narrower test than it sounds. A deal can be accretive simply because debt is cheap relative to the target's earnings yield, with no operational improvement at all — and a deal can still destroy value even while boosting EPS, if the acquirer overpaid relative to what the business is actually worth. That's why interviewers who ask about merger models are usually testing two things at once: can you build the mechanics, and do you understand what the output does and doesn't prove.

For a worked example with real numbers — combining an acquirer and target, splitting cash and stock consideration, and computing pro forma EPS step by step — see the Merger Consequences Model case study. If you want to start with the underlying accretion/dilution logic in isolation before adding the full merger model on top, the Accretion/Dilution: The Basic Concept case builds that intuition from scratch, and Full Accretion/Dilution Analysis extends it into a complete pro-forma EPS build.