Core Frequently asked Analyst

Walk me through a merger model.

What the interviewer is testing

The structure of the most common banking model.

Answer it out loud first

Take 30–60 seconds, as you would in the room. Then compare with the model answer.

 Show the model answer
In the interview — the 30-second answer

Project the buyer's and the target's earnings on the same basis. Set the purchase price and how it is paid — cash, new debt, new shares. Combine the income statements, adding synergies and subtracting the cost of the financing: interest on new debt, interest lost on cash used, and new D&A from asset write-ups and intangibles, all after tax. Divide by the buyer's shares plus any new shares to get pro-forma EPS, and compare with the buyer's standalone EPS: accretion or dilution. Then check leverage, ratings and ownership.

The full answer

  1. Inputs: offer price and premium, shares/cash/debt mix, interest rates, tax rate, synergies and their phasing, fees.
  2. Purchase price allocation: goodwill, write-ups, new intangibles and deferred tax.
  3. Pro-forma income statement:

Pro-forma NI = buyer NI + target NI + (synergies − new interest − lost interest on cash − extra D&A) × (1 − t)

  1. Pro-forma shares = buyer shares + new shares issued.
  2. Accretion / dilution = pro-forma EPS ÷ buyer standalone EPS − 1, for two or three years.
  3. Credit and ownership: pro-forma leverage, rating impact, target shareholders' stake.
  4. Sensitivities: price vs consideration mix, synergies needed to break even.

Exclude one-off transaction and integration costs from the "adjusted" EPS used for accretion, but show them.

Mistakes to avoid

  • Forgetting the interest lost on cash used to pay.

  • Ignoring the extra amortisation from new intangibles.

Follow-ups they may ask

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