What is the objective of creating a merger model?

The primary objective of creating a merger model is to assess whether the acquisition will be accretive or dilutive. An accretive acquisition occurs when the earnings per share (EPS) of the acquiring company increases post-acquisition, making it financially beneficial for the shareholders. On the other hand, a dilutive acquisition results in a decrease in EPS, which could signal potential financial issues or overvaluation of the acquired company.

Merger models utilize various financial metrics and projections to simulate the combined financial performance of the two companies, allowing analysts to compare the pre- and post-merger EPS. This analysis is crucial for strategic decision-making, as stakeholders need to understand the implications of the merger on their investments.

While determining the market value of the acquiring company, forecasting future revenue growth, and analyzing the debt-to-equity ratio are important aspects of financial analysis, they do not directly address the specific goal of evaluating the impact of the merger on share value and earnings, which is the essence of assessing accretion or dilution.