Merger Consequences Model

Step 1: Cash and Stock Consideration Split

Cash Consideration = $600.0m × 60% (0.60) = $360.0m

Stock Consideration = $600.0m × 40% (0.40) = $240.0m

The consideration mix is the single biggest lever in this model: more cash (funded by debt) adds interest expense but no new shares, while more stock adds new shares but no interest expense. Interviewers use this split to test whether you understand that the financing decision, not just the purchase price, drives whether a deal is accretive or dilutive.

Step 2: New Shares Issued

New Shares Issued = $240.0m / $40.00 = 6.0m shares

This is the dilution side of the ledger: every new share issued to pay for the deal spreads pro forma earnings over a larger share count. A higher acquirer share price means fewer new shares are needed to fund the same stock consideration, which is one reason acquirers prefer to use stock when their own shares are richly valued.

Step 3: After-Tax Incremental Interest Expense

Where: New Debt = Cash Consideration, since the cash portion is funded entirely with new debt.

Using the new debt ($360.0m), the interest rate (6.0%), and the tax rate (25.0%):

After-Tax Interest Expense = $360.0m × 6.0% × (1 - 25%) = $21.6m × 0.75 = $16.2m

This is the earnings cost side of the cash consideration. Because interest expense is tax-deductible, the after-tax cost is lower than the stated coupon — a detail interviewers frequently probe, since forgetting the tax shield overstates how expensive the debt financing really is.

Step 4: After-Tax Synergies

After-Tax Synergies = $10.0m × (1 - 25%) = $7.5m

Synergies are taxed just like any other operating benefit, so only the after-tax amount flows into combined earnings. In practice, acquirers are conservative here because overstating synergies is one of the most common ways a "value-creating" deal turns out to destroy value post-close.

Step 5: Pro Forma Combined Net Income and EPS

Pro Forma Net Income = Acquirer Net Income + Target Net Income + After-Tax Synergies − After-Tax Interest Expense

Plugging in the values ($150.0m acquirer, $40.0m target, $7.5m after-tax synergies, $16.2m after-tax interest):

Pro Forma Net Income = $150.0m + $40.0m + $7.5m − $16.2m = $181.3m

Pro Forma Diluted Shares Outstanding = Acquirer Shares + New Shares Issued = 50.0m + 6.0m = 56.0m

Pro Forma EPS = Pro Forma Net Income / Pro Forma Diluted Shares = $181.3m / 56.0m = $3.24

Comparing this to the acquirer's standalone EPS of $3.00, the deal is accretive by $0.24 per share, or 8.0%. This is the number a research analyst or investment committee looks at first when a deal is announced — it drives the market's initial read on whether the acquirer overpaid, even though EPS accretion alone says nothing about whether the deal earns its cost of capital.

Final Results

• Pro Forma Combined Net Income: $181.3m
• Pro Forma Diluted Shares Outstanding: 56.0m
• Pro Forma Diluted EPS: $3.24
• EPS Accretion / (Dilution): +$0.24 (+8.0%) vs. the $3.00 standalone acquirer EPS

This pro forma EPS figure is typically the headline number in the deal announcement and feeds directly into the accretion/dilution analysis bankers present to both boards, but it is only one input into whether the deal actually creates value once the purchase price, synergies realization risk, and cost of capital are weighed together.

Would you like to explore how the answer changes if the target carries existing debt that must be refinanced as part of the transaction?