In a merger model, what assumption is critically important for evaluating accretion or dilution?

Evaluating accretion or dilution in a merger model fundamentally relies on understanding the purchase price and method of payment. The purchase price directly affects the valuation of the target company and the financial implications for the acquirer. This includes how the payment is structured—whether it is in cash, stock, or a combination of both—which can significantly impact shareholders' equity.

When the acquirer uses cash, it reduces its liquidity but may provide a quicker path to realizing synergies and improving profitability. In contrast, issuing stock can dilute existing shareholders but may be viewed more favorably if the target company is highly valued. The structure of the deal determines how the combined earnings will reflect on the acquirer's financials, which is crucial for assessing whether the merger will be accretive (enhancing earnings per share) or dilutive (reducing earnings per share).

While other factors such as historical profitability and the number of shares outstanding are important for overall analysis, they do not directly impact the immediate calculation of accretion or dilution in the same way that the purchase price and payment method do. Understanding these nuances is essential for constructing a robust merger model and effectively analyzing potential outcomes.