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.
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 whatThe first question a board asks about an acquisition is whether it adds to or dilutes earnings per share, and this is the model that answers it. Bankers build it for every public-to-public pitch; corporate development teams run it before an approach; equity analysts rebuild it the morning a deal is announced. The contribution analysis beside it is where an exchange ratio is argued.
| A | B | C | D | E | |
|---|---|---|---|---|---|
| 1 | Assumptions | ||||
| 2 | Blue cells only. Both companies are invented. | ||||
| 4 | Driver | Unit | Year 1E | Year 2E | |
| 5 | Acquirer | ||||
| 6 | Share price | $ | 50.00 | ||
| 7 | Diluted shares outstanding | m | 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% | ||
| 14 | Target | ||||
| 15 | Share price, unaffected | $ | 30.00 | ||
| 16 | Diluted shares outstanding | m | 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 (assumed, not refinanced) | $m | 200.0 | ||
| 22 | Offer and funding | ||||
| 23 | Offer premium to unaffected price | % | 30.0% | ||
| 24 | Consideration paid in acquirer stock | % | 50.0% | ||
| 25 | Cash consideration funded with new debt | % | 80.0% | ||
| 26 | Interest rate on new debt | % | 6.0% | ||
| 27 | Interest forgone on cash used | % | 3.0% | ||
| 28 | Transaction fees (paid in cash) | $m | 25.0 | ||
| 29 | Financing fees, % of new debt | % | 1.5% | ||
| 30 | Financing fee amortisation period | years | 7 | ||
| 32 | Synergies and purchase accounting | ||||
| 33 | Run-rate pre-tax cost synergies | $m | 60.0 | ||
| 34 | Synergies realised, % of run-rate | % | 50.0% | 100.0% | |
| 35 | Write-up of identifiable intangibles | $m | 300.0 | ||
| 36 | Amortisation period of the write-up | years | 10 | ||
| 37 | Include the write-up amortisation (1 yes, 0 no) | # | 1 |
Click any cell. The inspector names the line, the schedule it belongs to and what kind of cell it is; blue on cream is an input, black a calculation, green a value from another sheet. Scroll sideways to see every year.
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Merger model: accretion and dilution: the workbook
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What the base case says
- Offer price per share
- 39.00
- Implied EV / Year 1 EBITDA
- 13.7x
- Accretion / (dilution), Year 1
- -2.2%
- Accretion / (dilution), Year 2
- 3.6%
- Breakeven synergies, Year 1
- $88.2m
- Target holders’ 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 acquirer buys a target for a mix of cash and stock. The model prices the offer, funds the cash, adds the target’s earnings and the synergies, charges the new interest, the interest forgone, the write-up amortisation and the fee amortisation, and divides by the new share count.
It answers the question every board asks first: is the deal accretive or dilutive to earnings per share, by how much, and how much synergy would it take to break even.
The contribution analysis sets what each side brings against what its shareholders own afterwards, which is where an exchange ratio is argued.
Seats: Investment banking, Private equity, Equity research and hedge funds.
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.
- Adjustments are made pre-tax and taxed together at the acquirer’s marginal rate. In practice the write-up amortisation is often not deductible for tax, which a deferred tax liability handles; the switch here treats it on a book basis.
- Target debt is assumed rather than refinanced, so it is inside enterprise value and outside sources and uses.
- Transaction and financing fees are paid from the acquirer’s cash. Financing fees are amortised over the life of the new debt; transaction fees are a one-off and do not enter pro forma earnings.
- New shares are issued at the acquirer’s current price. A collar or a fixed exchange ratio would change the count and is left for the reader to add.
- The breakeven synergy figure is the pre-tax run-rate at which Year 1 pro forma EPS equals standalone EPS, given everything else in the case.
Build it yourself
The starter workbook
The Pro Forma EPS sheet has been cleared below the standalone figures. Build the adjustments, the tax on them, pro forma net income and shares, the two EPS figures, accretion and the breakeven synergies. The Checks sheet ties the sensitivity grid back to your answer.
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 arrives in year one and all of it 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 how much synergy 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 a switch, 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 inspect: the whole workbook is on this page. A free account chooses one worked model to keep, and downloads every starter workbook. L3VLUP Pro ($25/month) downloads the whole library and opens every model’s formulas in the inspector.