Data Tool
Mergers & Acquisitions - Accretive vs. Dilutive Model
I built this M&A accretion and dilution model for my university’s student investment fund to give our Special Situations team a consistent way to assess how an acquisition could affect the buyer’s shareholders. It combines EPS impact, financing structure, synergies, leverage, break-even analysis, payback periods, and sensitivity testing to determine whether a deal creates value without relying on overly optimistic assumptions.
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This is another model I’ve been building for my university’s student investment fund to give us a structured way of evaluating M&A deals. The central question the model helps us answer is: when a company acquires another, does the deal increase or decrease the earnings the acquirer produces for each of its shares?
In this case, a company is acquiring another smaller firm using a combination of cash, newly issued debt, and newly issued stock. The model compares the acquirer’s earnings per share on its own with its pro forma earnings per share after the deal which for those of you who don’t know is the combined earnings of both companies, adjusted for the changes that the transaction causes. Changes might include things like the premium paid over the target company’s value, interest on the new debt, income lost on the cash spent, cost and revenue synergies, one-time integration costs, and transaction fees.
I designed the model to account for how the deal is paid for and how its benefits arrive over time. The financing mix determines how many new shares are issued and how much debt is added, this drives both the dilution and the leverage. Synergies are separated into their full run-rate level and the portion actually realized each year, since a buyer rarely captures the entire amount immediately. Since the one-time costs occur upfront while the synergies build overtime, the model reports the result across three years.
The dashboard (which is the final output of the model) shows the estimated EPS accretion/dilution for each of the three years and offers conservative, base, and optimistic scenarios. The dashboard also shows other things like the implied purchase multiple, the break-even synergies, and the payback period on the premium transaction costs.