Building a merger model
By SuperdayReps · Wharton MBA · ex-Greenhill · investment banking interview coaching
6 min read · updated July 2, 2026
A merger model looks intimidating because people picture a 40-tab spreadsheet. It isn't that. It's a short logical chain, and if you can say the chain out loud, you can build the model. Interviewers test the chain, not your Excel speed.
Here's the whole thing: figure out how you're paying for the deal (sources and uses), account for what you bought (purchase accounting and goodwill), stack the two companies' earnings together (combine the income statements), then divide by the new share count to get pro-forma EPS and read off accretion or dilution. Five steps. Learn them in order.
Step 1: Sources and uses
Before anything else, you answer two questions. What does the deal cost, and where's the money coming from? Uses is the spend. Sources is the funding. They must equal.
The biggest use is buying the target's equity: shares outstanding times the offer price per share, which already bakes in a control premium over where the stock traded. But equity isn't the only use. You usually refinance the target's existing debt (lenders often require it on a change of control), and you pay transaction fees: advisory, financing, legal. Those fees are real cash out the door, and beginners forget them.
On the sources side you've got three levers: cash on the balance sheet, new debt raised for the deal, and new stock issued to the seller. The mix you pick drives everything downstream, so hold that thought.
Sources and uses is where you compute purchase price correctly, and it's where the enterprise-value-vs-equity-value distinction bites. You buy the target's equity at the offer price, but you're also on the hook for its net debt, which is why refinancing shows up in uses. Get the enterprise value vs. equity value bridge wrong and the entire model inherits the error.
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Frequently asked
- What are the steps to build a merger model?
- Five steps in order: sources and uses to fund the deal, purchase accounting and goodwill to record what you bought, combine the income statements with the deal adjustments, divide by the new share count for pro-forma EPS, then read off accretion or dilution. It is a short logical chain, not a giant spreadsheet.
- Why does goodwill get created in a merger model?
- Goodwill is the balancing plug that makes the combined balance sheet tie. It equals the equity purchase price minus the fair value of net identifiable assets. Whatever you paid above those identifiable assets, for the brand, people, and market position, has to live somewhere on the asset side, and that gap is goodwill.
- What adjustments do people forget when combining the income statements?
- The cost of financing the deal. If you paid cash you gave up forgone interest income; if you raised debt you owe new interest expense, both after tax. You also add after-tax synergies and any incremental D&A from writing up assets. Skip the financing cost and you overstate earnings and call a dilutive deal accretive.
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