Merger Model Build Order: Why Sourcing Assumptions Before Structure Prevents Rework at the Accretion Line

Merger model build order is the sequence in which you populate an M&A accretion/dilution model: source and lock every driver assumption first, wire the pro forma structure second, and only then read the accretion line. Getting the sequence wrong forces a rebuild of every downstream calculation the moment a banker changes the mix of cash and stock, the assumed tax rate, or the day-one cost savings figure. This guide walks the correct merger model build order and shows why the assumptions tab has to carry every driver the accretion line depends on before a single pro forma cell is typed.

Why the Accretion Line Punishes a Bad Merger Model Build Order

An M&A model has one output that matters to a public acquirer's board, pro forma EPS in Year 1 and Year 2 versus standalone EPS. That single figure, the accretion/dilution line, is a function of dozens of inputs sitting across different tabs: standalone earnings for both companies, the offer price, the cash-versus-stock split, the coupon on new debt, the foregone interest on deployed cash, new shares issued to target holders, goodwill and identifiable intangible amortisation, run-rate cost savings, integration expense, and the blended tax rate the pro forma entity will pay. If any one of those inputs is hard-coded inside a downstream formula rather than pulled from a single assumptions block, changing it means editing every cell that references it.

Wall Street Prep's merger model tutorial makes the same point in its walkthrough: the model starts with standalone earnings, determines purchase price and structure, calculates new shares, estimates financing costs, layers in cost savings, and only then compares pro forma EPS to standalone EPS. Corporate Finance Institute's build guide runs the same order. The reason both training shops teach the sequence the same way is that the accretion line is the most rework-sensitive number in the workbook.

Practical takeaway. Before you build a single pro forma tab, list every driver that will end up feeding the accretion line and give each one a named cell in a single assumptions block. If you cannot point at the cell that houses the target's standalone tax rate, the model will bleed hours on every deal revision.

The Correct Merger Model Build Order, Step by Step

Use this eight-step sequence on any accretion/dilution model, whether it is an Excel template you downloaded or a spreadsheet model you are building from a blank workbook. Each step depends on the outputs of the step before it, and every step reads from the assumptions tab rather than hard-coding its own inputs.

Assumptions tab. One block per category: deal terms, financing, cost savings, tax, close date. Every downstream formula points here.
Standalone projections. Three to five years of income statement for acquirer and target, sourced from the last 10-K, the most recent 10-Q, and sell-side consensus. No pro forma effects yet.
Sources & Uses. Total uses (equity purchase price, refinanced target debt, advisory and financing fees) equal total sources (new debt, new equity, balance-sheet cash).
Purchase price allocation. Allocate the excess of purchase price over book value to identifiable intangibles (customer relationships, developed technology, tradenames) and the residual to goodwill. Set useful lives per intangible class.
Financing schedule. New debt tranches with coupon, tenor, and amortisation. Foregone interest on cash used at the acquirer's after-tax yield. New share count if stock consideration.
Pro forma income statement. Add the two standalones, layer in intangible amortisation, incremental interest expense, foregone interest income, and phased cost savings.
Accretion/dilution summary. Divide pro forma net income to common by pro forma diluted share count. Compare to standalone acquirer EPS. Show the delta in cents per share and in percent.
Sensitivity tables and breakeven. Two-variable tables around price and cost savings, plus a breakeven calculation showing the run-rate pre-tax cost savings needed to hit Year 1 EPS neutrality.

Practical takeaway. If you find yourself back at step 4 to change a tax rate after step 6 is done, your assumptions tab is missing a cell. Add it before you edit the pro forma.

Sourcing the Assumptions That Actually Move the Accretion Line

Not every assumption has the same effect on the accretion line. Concentrate the sourcing effort on the drivers with the largest EPS sensitivity, and pull each one from a public document with a date on it so the model can be defended in front of a client or a committee.

Offer price and premium. Deal press release, 8-K, proxy. Microsoft's January 18, 2022 announcement of its Activision Blizzard acquisition disclosed $95 per share in cash, a total $68.7 billion equity value, and the deal closed on October 13, 2023 at a total cost of $75.4 billion.
Financing mix. Deal press release and subsequent credit agreement 8-Ks. Broadcom's VMware close on November 22, 2023 was funded with $30.8 billion of cash and 544 million shares of Broadcom stock valued at $53.4 billion, with the cash portion drawn from $30.4 billion of term loans under a credit agreement dated August 15, 2023.
Cost of new debt. The commitment letter or the pricing supplement. If the deal predates the pricing, use the acquirer's existing curve plus a merger financing spread of 25 to 75 basis points depending on rating impact.
Run-rate cost savings. Investor presentation or the deal call. Broadcom's stated target on the VMware acquisition was $250 million of cost savings once integration completed. Model the phase-in over three years and separate revenue uplift, which the accretion line almost never gives credit for, from cost reductions.
Blended tax rate. Use the acquirer's expected ongoing effective tax rate for the pro forma, not the target's standalone rate. Wall Street Prep flags this as one of the most common associate errors.
Close date. A July 1 close contributes half a year of the target's earnings in Year 1. Bake the stub period into the pro forma so the accretion line reads correctly against the acquirer's fiscal year.

Practical takeaway. Every one of the six drivers above has a public source. Paste the link into a Notes column next to the assumption cell. When the deal team asks where the $250 million figure came from, the answer is a URL, not a memory.

Case Study: What the Microsoft and Broadcom Filings Force Into the Assumptions Tab

The two largest technology M&A closes of 2023 illustrate why the assumptions block has to be built before the pro forma. Both deals published purchase price allocations that a competent M&A model has to reproduce, and both surface assumption categories a shallow model would miss.

Microsoft's Activision purchase price allocation, disclosed in its FY24 Q2 10-Q, split the $75.4 billion cost across $51.0 billion of goodwill, $22.0 billion of identifiable intangibles, $13.0 billion of cash and equivalents acquired, and a set of assumed liabilities including $2.8 billion of long-term debt and $4.7 billion of deferred taxes. The intangibles line alone drives years of amortisation expense that hits the accretion line every quarter. A model that lumps intangibles into goodwill (which is not amortised for GAAP) understates the EPS drag by several cents.

Broadcom's VMware financing forces a different assumption set. The mixed cash-and-stock structure means the model has to track a new share count (544 million Broadcom shares issued) alongside $30.4 billion of new term loans. The accretion line is sensitive to both the coupon on the new debt and the diluted share count post-close. A model that hard-codes the standalone Broadcom share count into the EPS formula silently overstates accretion until the number is caught in review, usually the day before a fairness opinion is due.

Practical takeaway. If the deal uses stock, the assumptions tab needs a "new shares issued" cell that feeds every pro forma diluted-share formula. If the deal uses debt, it needs a coupon cell and a tenor cell. Both cases need an intangible amortisation schedule that ties to a purchase price allocation, not a plug.

Sensitivity Tables and Breakeven Cost Savings: The Output That Justifies the Sequence

Bankers almost never present a single-point accretion number. They present a range. That range is produced by two-variable data tables that flex the two most sensitive drivers, typically offer price on one axis and run-rate cost savings on the other. If the assumptions tab was built correctly, generating these tables is a five-minute Excel step. If it was not, every cell in the table has to be rebuilt.

Price vs cost savings table. Offer price per share on rows, run-rate pre-tax cost savings on columns. Fill each cell with Year 1 EPS accretion in percent.
Financing mix table. Percent cash on rows, percent stock on columns. Useful when the deal structure is still under negotiation.
Breakeven cost savings. Solve for the run-rate pre-tax cost saving that makes Year 1 pro forma EPS equal standalone EPS. If the breakeven is above the amount management has publicly guided, the deal is dilutive on stated targets.
Year 2 accretion. Run the same tables for Year 2 to show the effect of a full year of cost savings and a full year of target earnings.

Practical takeaway. The breakeven figure is the single most useful number a merger model produces. If a deal needs $600 million of run-rate cost savings to be EPS neutral and management has guided to $250 million, the deal is dilutive on guidance and the model has just made that visible in one cell.

Starting From a Ready-Made Merger Model Template

Building the assumptions tab from a blank sheet on every deal is the reason associates lose weekends. A ready-made merger model Excel template gives you the block structure, the sources & uses, the purchase price allocation waterfall, the intangible amortisation schedule, the financing schedule, the pro forma income statement, the accretion/dilution summary, and the two-variable sensitivity tables already wired to a single assumptions block. Every driver has a named cell, every downstream formula reads from it, and a change to the offer price, the coupon, or the cost savings flows through to the accretion line in one recalculation.

The step by step build order in this guide is the same order the ModelStack M&A and IB templates follow. If you want the assumptions block and the accretion output pre-wired, start from a spreadsheet model that already has the sequence baked in and spend your time on the driver sourcing, which is where the analysis actually sits, rather than on the plumbing.