Merger model: accretion and dilution
Is the deal accretive, and what would break even. Price an offer, fund it, and say whether it is accretive, by how much, and how much synergy it would take to break even.
Built in: Investment banking, Private equity, Equity research and hedge funds
By Surojit Chakraverti, founder of L3VLUP and an investor running a long-short healthcare and technology equities strategy.
On this subject: merger model: accretion and dilution.Updated 30 September 2026
Who builds it, and for whatOne of the first questions a board asks about an acquisition is whether it adds to or dilutes earnings per share, and this model answers it. Bankers build it for public-to-public pitches; corporate development teams run it before an approach; equity analysts rebuild it when a deal is announced. The contribution analysis beside it is where an exchange ratio is argued.
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| A | B | C | D | E | F | |
|---|---|---|---|---|---|---|
| 1 | Assumptions | |||||
| 2 | $m unless stated. Year 1E and Year 2E are the first two years after close. | |||||
| 4 | Driver | Unit | Year 1E | Year 2E | Notes | |
| 5 | Acquirer | |||||
| 6 | Share price (illustrative input) | $ per share | 50.00 | New shares are issued at this price. | ||
| 7 | Diluted shares outstanding | m shares | 200 | |||
| 8 | Revenue | $m | 3,000.0 | 3,200.0 | ||
| 9 | EBITDA | $m | 700.0 | 760.0 | ||
| 10 | Net income | $m | 400.0 | 440.0 | ||
| 11 | Net debt | $m | 600.0 | |||
| 12 | Marginal tax rate | % | 25.0% | Applied to all pro forma adjustments. | ||
| 14 | Target | |||||
| 15 | Unaffected share price (illustrative input) | $ per share | 30.00 | Before the offer became known. | ||
| 16 | Diluted shares outstanding | m shares | 100 | |||
| 17 | Revenue | $m | 1,000.0 | 1,080.0 | ||
| 18 | EBITDA | $m | 300.0 | 325.0 | ||
| 19 | Net income | $m | 150.0 | 165.0 | ||
| 20 | Net debt | $m | 200.0 | Assumed by the acquirer, not refinanced. | ||
| 22 | Offer and funding | |||||
| 23 | Offer premium to unaffected price | % | 30.0% | |||
| 24 | Stock consideration, % of equity purchase price | % | 50.0% | Paid in new acquirer shares. The rest is paid in cash. | ||
| 25 | New debt, % of cash consideration | % | 80.0% | The rest of the cash, and all fees, come from acquirer cash. | ||
| 26 | Interest rate on new debt | % | 6.0% | Annual, pre-tax | ||
| 27 | Interest rate forgone on cash used | % | 3.0% | Annual, pre-tax | ||
| 28 | Transaction fees | $m | 25.0 | Paid from acquirer cash. Not in pro forma earnings. | ||
| 29 | Financing fees, % of new debt | % | 1.5% | Paid from acquirer cash and amortised. | ||
| 30 | Financing fee amortisation period | years | 7 | |||
| 32 | Synergies and purchase accounting | |||||
| 33 | Run-rate cost synergies, pre-tax | $m | 60.0 | Annual amount once fully achieved. | ||
| 34 | Synergies recognised, % of run-rate | % | 50.0% | 100.0% | Share of run-rate recognised in each year | |
| 35 | Write-up of identifiable intangibles | $m | 300.0 | |||
| 36 | Write-up amortisation period | years | 10 | |||
| 37 | Write-up amortisation in EPS | # | 1 | 1 = included, 0 = excluded. Applies to all EPS results and both grids. | ||
Select a cell to see its row, its schedule and the type of cell. Font colours: blue for inputs, black for formulas, green for links to other sheets. Scroll sideways to see every period.
Download
Merger model: accretion and dilution: the workbook
Excel workbook with working formulas, no macros and no external links. Work with it above first; it is the same model as the preview.
What the base case says
- Offer price per share
- 39.00
- Implied EV / target Year 1E EBITDA
- 13.7x
- Accretion / (dilution), Year 1E
- -2.2%
- Accretion / (dilution), Year 2E
- 3.6%
- Breakeven run-rate synergies, Year 1E
- $88.2m
- Target shareholders’ pro forma ownership
- 16.3%
Read from the workbook as served, every input at its default. Periods: Year 1E, Year 2E. The figures are invented and move with whatever you type in.
What this model is
An accretion and dilution model for an acquirer buying a target for a mix of cash and stock, over the first two years after close (Year 1E and Year 2E).
It prices the offer, sets out sources and uses, adds synergies and purchase accounting adjustments to combined net income, and compares acquirer standalone EPS with pro forma EPS. It also calculates breakeven synergies, a contribution analysis and two sensitivity grids.
Uses: testing whether a deal increases or reduces the acquirer’s EPS, and which terms drive the result.
Seats: Investment banking, Private equity, Equity research and hedge funds.
Careers that do this work: investment banking, private equity, growth equity, corp dev / m&a, venture capital.
How the schedules connect
Every row in the workbook is tagged with the schedule it belongs to; the inspector above shows the tag when you click a row. These are the schedules this model is made of and where each one lives.
Purchase price and consideration
Offer, premium, mix, new shares, exchange ratio
Assumptions, rows 6–11 · Assumptions, rows 15–20 · Purchase Price, rows 5–10 · Purchase Price, rows 13–18
Sources and uses
What the deal costs and who funds it
Assumptions, rows 23–30 · Sources & Uses, rows 5–8 · Sources & Uses, rows 11–15 · Sources & Uses, rows 18–19
Debt schedule
Tranches, interest, amortisation and the sweep
Pro Forma EPS, rows 12–15
Synergies
Run-rate, phase-in, after tax
Assumptions, rows 33–34 · Pro Forma EPS, row 11 · Pro Forma EPS, rows 16–18
Purchase accounting
The write-up that amortises
Assumptions, rows 35–37 · Pro Forma EPS, row 14
Tax
Tax on profit, and tax on operating profit
Assumptions, row 12 · Pro Forma EPS, row 17
Pro forma EPS: accretion and dilution
Standalone to pro forma, per share
Pro Forma EPS, rows 6–8 · Pro Forma EPS, rows 21–28 · Pro Forma EPS, rows 31–32
Contribution analysis
What each side brings against what it owns
Contribution, rows 6–10
Sensitivity tables
Two assumptions at once, without a data table
Sensitivity, rows 5–7 · Sensitivity, rows 10–15 · Sensitivity, rows 18–25
What you should be able to explain
- Why a stock deal dilutes when the acquirer’s price-to-earnings ratio is below the price it pays, and a cash deal accretes when the after-tax cost of funding is below the target’s earnings yield.
- What sits in the pro forma adjustments: new interest, interest forgone, write-up amortisation, fee amortisation, synergies.
- Why transaction fees do not enter pro forma earnings and financing fees do.
- How the exchange ratio, the new share count and pro forma ownership are the same fact three ways.
- What the contribution analysis says that the accretion number does not.
What a reviewer looks for
- Issuing new shares at the offer price rather than the acquirer’s own price.
- Adding synergies pre-tax to net income.
- Forgetting the interest the acquirer no longer earns on the cash it spends.
- Calling a deal accretive on year two while year one is dilutive, without saying so.
Conventions this workbook uses
Stated on the cover sheet too. A model is only as trustworthy as the decisions it tells you it made.
- Accretion / (dilution) = pro forma EPS / acquirer standalone EPS - 1. A positive figure is accretion; a negative figure is dilution.
- Equity purchase price is the amount paid for the target’s shares. Implied enterprise value adds target net debt. The funding requirement is total uses: equity purchase price plus transaction and financing fees.
- Target net debt is assumed rather than refinanced, so it is in enterprise value but not in sources and uses.
- Synergies are a pre-tax run-rate, recognised each year at the % of run-rate set on the Assumptions sheet.
- Pro forma adjustments are pre-tax and taxed together at the acquirer’s marginal rate. The write-up amortisation is treated as tax-deductible on a book basis; where it is not deductible for tax, a deferred tax liability would be recognised. The write-up amortisation input includes it in, or excludes it from, every EPS result.
- Interest on new debt and interest forgone on cash are full-year charges on the amounts at close. Debt repayment is not modelled.
- Transaction and financing fees are paid from acquirer cash. Financing fees are amortised over the period on the Assumptions sheet; transaction fees are a one-off and do not enter pro forma earnings.
- New shares are issued at the acquirer’s illustrative share price. Collars and fixed exchange ratios are not modelled.
- Breakeven synergies are the pre-tax run-rate at which pro forma EPS equals standalone EPS in each year, with every other input unchanged.
- Contribution percentages are each side’s share of combined financials. Ownership percentages are shares of the pro forma share count. The two are separate measures.
Build it yourself
The starter workbook
The Pro Forma EPS sheet has been cleared below the standalone net income. Build the pre-tax adjustments, the tax on them, pro forma net income and shares, standalone and pro forma EPS, accretion / (dilution) and breakeven synergies. The Checks sheet shows when the sensitivity grid centres tie to your result.
Blanks: Pro forma EPS: accretion and dilution, Synergies. Free with any account. Compare with the worked model when you are done: download above.
The path around this model
Understand it, drill it, read the build, then apply it to a real company.
Understand · Primer
Accretion / Dilution
Intermediate · a curated reel with a quiz
Build · Lab · ~8 min
Accretion / Dilution Animator
Call a deal accretive or dilutive from P/E, premium and financing mix before you open a model.
Read · Guide · 12 min
How to Build a Merger Model: Purchase Accounting, Financing and Accretion
Read · Guide · 8 min
M&A Interview Questions: Accretion/Dilution and Beyond
Read · Guide · 7 min
Enterprise Value vs. Equity Value, Once and For All
Apply · Skill
Accretion and Dilution
Show what the deal does to the acquirer’s earnings per share.
Apply · Skill
Model Audit
Find the errors in a financial model before someone senior does.
Vocabulary: Merger Model, Synergies, Goodwill, Equity Value.
Questions about this model
Why is the deal dilutive in year one and accretive in year two?
Because the synergies phase in. In the base case half the run-rate synergies are recognised in year one and all of them in year two, while the new interest, the write-up amortisation and the new shares are all there from day one. The breakeven line shows the run-rate year one would have needed.
How is the breakeven synergy figure derived?
It is the pre-tax run-rate at which pro forma net income divided by pro forma shares equals standalone EPS. The formula solves that equation for synergies given everything else in the case, and divides by the phase-in so the answer is a run-rate rather than a realised figure.
Where is goodwill?
Off the page on purpose. Goodwill does not amortise, so it changes the balance sheet and not earnings per share. The write-up of identifiable intangibles does amortise, and that line is here with an input to include or exclude it, because it is the purchase-accounting item that moves the answer.
Why are fees paid from cash rather than funded with debt?
To keep sources and uses free of a circular reference: financing fees are a percentage of debt raised, and debt raised to pay financing fees is a loop. Paying fees from balance-sheet cash is a common simplification and it costs a little forgone interest, which the model charges.
What does it cost?
Nothing to preview: the whole workbook is on this page, and a free account works with it online, every formula included. Every starter workbook downloads with a free account. L3VLUP Plus ($4.99/month) keeps one worked model each billing month, yours for good, and L3VLUP Pro ($25/month) keeps every one.
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