How to Answer “How do synergies affect a merger model?” in Investment Banking Interviews

Start with a tight definition: synergies are incremental cash flows (or avoided costs) created by combining two businesses versus operating separately. Then classify them because the model treatment differs:

• Cost synergies (procurement savings, headcount rationalisation, facility consolidation) typically reduce operating expenses and increase EBITDA, often with higher confidence.
• Revenue synergies (cross-sell, distribution expansion, pricing power) increase revenue but usually carry more uncertainty and may require incremental costs.
• Run-rate savings are recurring benefits that ramp over time.
• One-time items include integration costs (severance, IT migration, advisory, restructuring) and capex to achieve the synergies.

This classification sets you up to place each item correctly on the P&L and cash flow and to explain timing (ramp) rather than assuming synergies appear immediately at 100%.

Explain the mechanics in the order you’d build a merger model. In the combined forecast, synergies generally appear as:

• P&L: cost synergies reduce COGS and/or SG&A; revenue synergies raise revenue (with appropriate variable costs). This increases EBITDA/EBIT, then flows to taxes.
• Cash flow: higher after-tax operating profit increases operating cash flow, but you subtract one-time integration costs (often in operating cash flow) and any incremental capex.
• Balance sheet: improved cash generation can accelerate debt paydown, raising net income and reducing interest expense over time.

Call out common modelling details: you usually model synergies as separate line items or as margin improvements with a clear bridge, and you apply a ramp schedule (e.g., 30%/70%/100%) to reflect execution. For credibility, you keep revenue synergies conservative and explicitly include the costs to realise them.

Tie the synergy inputs to the outputs the interviewer cares about:

• EPS accretion/dilution: synergies increase operating income, but EPS also depends on financing (interest expense), taxes, and purchase accounting (especially amortisation of acquired intangibles) and any incremental shares issued.
• Leverage and credit metrics: higher EBITDA reduces net leverage and can support more debt capacity; faster debt paydown reduces risk and interest over time.
• Deal returns: synergies raise free cash flow, improving IRR/ROIC and supporting a higher affordable purchase price.

Make the key point: synergies can turn a deal from dilutive to accretive, but only if after-tax synergies net of integration costs exceed the incremental financing and purchase accounting drag. In an interview, explicitly state the net synergy number you’re using (gross synergy less dis-synergies, less one-offs, tax-affected).

Close your framework with checks that show you can model like an analyst:

• No double-counting: if management guidance already assumes certain cost saves in the standalone forecasts, don’t layer them again in the merger model.
• Match costs to benefits: include one-time integration costs and capex in the periods they occur; don’t treat all synergy as “free”.
• Tax and margin realism: apply appropriate tax rates; revenue synergies should not create implausible margin expansion without explaining incremental costs.
• Compare to purchase accounting impact: sanity-check whether synergy-driven EBIT growth is large enough to offset incremental D&A and intangible amortisation.

End by stating you’d run sensitivities on synergy magnitude and ramp because synergy assumptions are often the biggest driver in financial modeling interview questions about M&A.