How to Answer “Walk me through a merger model at a high level.” in Investment Banking Interviews
In investment banking interview prep, few prompts come up as often as: “Walk me through a merger model at a high level.” It sits at the heart of merger model interview questions because it tests whether you can explain the mechanics of an M&A analysis clearly, without getting lost in Excel details.
A strong answer stays structured: what the model is for, the key building blocks (purchase price, financing, purchase accounting, pro formas), and how you interpret the output (accretion/dilution and sensitivities).
What These IB Technical Questions Are Really Testing
Interviewers use this prompt to assess whether you understand the workflow of a merger model and can communicate it like an analyst who has built (or audited) one. It’s not a request for a cell-by-cell tutorial; it’s a test of whether you know what matters, in what order, and why.
They’re also testing judgement around assumptions: what drives value creation (synergies, multiple paid, funding mix, cost of financing), what drives accounting outcomes (goodwill/intangibles, D&A step-up), and what can make a “good” deal look bad on EPS (or vice versa).
Finally, it’s a communication test typical of ib technical questions: can you give a crisp 2–3 minute walkthrough, use correct terms (e.g., enterprise value, sources & uses), and proactively flag the usual sensitivities and sanity checks.
Merger Model Framework: The High-Level Walkthrough
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Step 1: State the purpose and the key outputs
Start with the one-line definition: a merger model combines two companies’ financials under a specific deal structure to evaluate economics and returns. Then name the outputs you’re solving for—typically accretion/dilution to EPS, leverage and credit metrics, pro forma ownership (if stock is used), and sometimes implied returns for the buyer.
At a high level, explain that the model translates a headline offer (price per share or EV) into a full sources & uses and then into pro forma financial statements. This sets expectations that you’re focused on the decision-useful results rather than Excel mechanics.
Optionally, anchor it to valuation logic: the purchase price is informed by trading comps/precedent transactions and can be cross-checked with intrinsic tools like DCF (discounted using WACC) as part of valuation interview prep—but the merger model answers “does the deal work on the buyer’s metrics given the structure?”.
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Step 2: Build the deal assumptions and Sources & Uses
Outline the deal terms: offer price, target share count, equity value, net debt, and any adjustments (minorities, pensions, fees) to arrive at enterprise value and total uses. Then walk through the Sources & Uses: sources could include cash on hand, new debt tranches, and stock consideration.
Call out the key driver categories interviewers expect: purchase multiple (or premium), financing mix (cash/debt/stock), interest rates and amortisation, transaction fees, and timing (close date and first fiscal year).
Mention practical details analysts handle: setting up pro forma shares (buyer shares + new shares issued), capturing fees (expensed vs capitalised), and ensuring the balance sheet “uses” are fully funded by “sources.” This is the backbone that makes the rest of the merger model consistent.
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Step 3: Apply purchase accounting to create the opening pro forma balance sheet
Explain that once you have the consideration and funding, you apply purchase accounting to translate the transaction into an opening combined balance sheet. At a high level this includes writing up/down the target’s assets and liabilities to fair value, creating intangibles where relevant, and recording goodwill as the plug (purchase price minus fair value of net identifiable assets).
Then tie purchase accounting to the income statement: the main ongoing impacts are incremental D&A from asset write-ups and amortisation of intangibles, plus potential changes to deferred taxes.
This step is where many merger model walkthroughs become messy, so keep it directional: “purchase accounting affects future earnings via non-cash charges, and affects balance sheet items that must tie out.” Interviewers mainly want to hear that you understand what changes and why it matters for EPS and leverage.
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Step 4: Forecast pro forma income statement, cash flow, and balance sheet impacts
Describe combining the buyer and target operating forecasts (revenue growth, margins, capex, working capital) and layering in deal effects: synergy assumptions (cost saves/revenue synergies, ramp timing, one-time costs), incremental interest expense on new debt, lost interest income if cash is used, and the purchase accounting charges from the prior step.
At a high level, you don’t need three statements, but you should mention cash flow and balance sheet consequences: debt paydown from excess cash generation, changes in cash balances, and how those flow into net interest and leverage over time.
Emphasise that the logic is to create a consistent pro forma P&L (and ideally a pro forma balance sheet) so the accretion/dilution result is not a “black box.” This is also where you’d incorporate the buyer’s tax rate and any financing fees amortisation assumptions.
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Step 5: Interpret results, run sensitivities, and sanity-check
Finish with how you evaluate the deal: calculate pro forma EPS vs standalone EPS to get accretion/dilution, then explain what you sensitivity-test—purchase price (or EV/EBITDA multiple), synergies, interest rates/financing mix, and sometimes the close date.
Add common sanity checks: does goodwill look plausible relative to the premium; do pro forma margins move in the direction implied by synergies; does leverage align with the stated financing plan; do shares and interest expense reconcile to the sources.
Conclude with decision framing: “If the deal is dilutive at the base case, I’d look at whether it becomes accretive under reasonable synergy and financing assumptions, and whether the buyer’s balance sheet can support the leverage.” That shows you can turn the merger model into an investment-banking recommendation.
Sample Answer for Merger Model Interview Questions (Analyst)
A merger model shows what happens when a buyer acquires a target under a specific price and financing structure. At a high level, I’m using it to translate the deal terms into pro forma financials and then judge outputs like EPS accretion/dilution, leverage, and key sensitivities.
I’d start with the deal assumptions and build a Sources & Uses: uses are the purchase of the target’s equity plus assumed net debt and transaction fees, and sources are the funding mix—cash, new debt, and/or stock issued. From there I set up the opening pro forma balance sheet using purchase accounting: mark the target’s assets and liabilities to fair value, create identifiable intangibles where appropriate, and record goodwill as the plug, which then drives ongoing non-cash charges like amortisation and incremental D&A.
Next I forecast the combined income statement by adding the buyer and target projections and layering in deal effects—synergies with a ramp, one-time integration costs, incremental interest expense on new debt, lost interest income if cash is used, and the purchase accounting amortisation. If the model is built with cash flow and balance sheet linkages, I also reflect debt paydown over time and how that feeds back into interest and leverage.
Finally, I compute pro forma EPS and compare it to the buyer’s standalone EPS to get accretion/dilution, and I run sensitivities around purchase price, synergies, and financing assumptions. I also sanity-check that shares, interest expense, goodwill, and leverage all tie back to the Sources & Uses and the stated deal rationale.
- Open with purpose + outputs (EPS, leverage, sensitivities) before mechanics.
- Name the three pillars interviewers expect: Sources & Uses, purchase accounting, pro forma forecast.
- Show you understand what drives accretion/dilution: price, synergies, and financing mix/cost.
- Keep purchase accounting directional: goodwill/intangibles and the earnings impact via D&A/amortisation.
- Close with sensitivities and tie-outs to prove control of the model, not just vocabulary.
Common Pitfalls in an Accretion/Dilution Walkthrough
- Diving into spreadsheet steps without first stating what the merger model is trying to answer (accretion/dilution, leverage, ownership).
- Skipping Sources & Uses or failing to connect financing assumptions to interest expense, shares issued, and leverage.
- Treating purchase accounting as a buzzword and not mentioning goodwill/intangibles and the downstream D&A/amortisation impact.
- Forgetting synergy timing and one-time costs, which can materially change the first-year accretion/dilution result.
- Not mentioning sensitivities; interviewers expect you to stress price and financing mix at a minimum.
- Using valuation tools (DCF/WACC) as the whole answer rather than as a cross-check within an M&A context.
Follow-Ups That Push on Purchase Accounting and Valuation
What typically drives accretion/dilution the most in a merger model?
Usually the purchase multiple vs the buyer’s multiple, synergy size/timing, and the financing mix and cost (debt rate vs equity issuance).
How does using cash vs stock change the answer?
Cash reduces interest income (or increases debt if funded), while stock increases share count; both change EPS differently, and stock also changes ownership/consideration.
Where do goodwill and intangible write-ups show up in the outputs?
They sit on the pro forma balance sheet, and intangibles (and some asset write-ups) create amortisation/D&A that reduces pro forma earnings and can affect accretion/dilution.
How would you sanity-check a merger model quickly?
Reconcile shares issued and interest expense back to Sources & Uses, check goodwill vs premium, and confirm leverage and margins move consistently with the assumptions.
When would you bring DCF and WACC into an M&A discussion?
As part of pricing and valuation support—DCF (discounted at WACC) can triangulate whether the offer implies a reasonable intrinsic value, but the merger model tests deal impact under the chosen structure.
How to Practise for Valuation Interview Prep and M&A Cases
- Practise a 2–3 minute “merger model walkthrough for interview prep” version that hits: purpose → Sources & Uses → purchase accounting → pro formas → sensitivities.
- Record yourself answering and remove accounting rabbit holes; keep purchase accounting to the 2–3 impacts that change EPS.
- Build a simple accretion/dilution template once, then rehearse explaining the drivers without referencing a spreadsheet.
- In mock sessions (including on AceTheRound), ask for follow-ups on synergies and financing so you can practise defending assumptions under pressure.
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