Explain why signing and closing are separate events, and name at least three things that can change in a model's assumptions between them.
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The answer
Signing and closing are separate events because a deal needs regulatory clearance, shareholder votes, and other closing conditions before it is legally done. That gap is real time, and the assumptions we locked into the model on announcement day can shift materially before we actually close. Three things that can change in that window are financing costs, the target's standalone performance, and the competitive landscape.
If interest rates rise during a multi-month regulatory review, the cost of acquisition debt and the interest expense in the pro forma income statement both move, changing the accretion math. The target's standalone earnings can also diverge from the signing-date forecast, so the base earnings we are combining are different, which flows straight into pro forma EPS.
Finally, a competitor can respond during the gap, whether by launching a rival product, acquiring a key customer, or entering a new market, which can invalidate the synergy assumptions we built into the model and force us to recut the deal economics at closing.
Accretion / dilution
| Acquirer standalone net income | 300 |
| + Target net income | 80 |
| + After-tax synergies | 15 |
| − After-tax incremental interest | (10) |
| Pro forma combined net income | 385 |
| Acquirer standalone EPS | $3.00 |
| Pro forma share count | 125 |
| Pro forma EPS | $3.08 |
| Accretion | 2.7% |
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- Walk through why cost synergies are generally weighted more heavily than revenue synergies in accretion/dilution and breakeven analysis.
- Walk through the six stages of a full merger-model build in order and explain, for each stage, one thing that would have to be redone if the interviewer changed the financing mix midway through.
- A friendly deal turns into a contested auction when a second strategic bidder emerges. Explain how this changes the effective purchase price, the financing plan, and the synergies you would be willing to credit, and why all three should move together rather than independently.
- Explain the relationship between the breakeven premium and the breakeven synergies calculations: why are they the same underlying equation, and how would a deal team use each one differently in a live negotiation?
- Acquirer standalone EPS $3.00 on 400M shares. It proposes an all-stock acquisition of a target with $120M net income at a $50/share acquirer price, crediting $25M of pre-tax cost synergies (fully phased in year one, 25% tax rate). Solve for the maximum equity purchase price that keeps the deal exactly breakeven on EPS, then state the implied maximum premium if the target's unaffected market cap is $1,000M.
- Midway through a deal's regulatory review, interest rates rise 250bps and the target's normalized earnings are cut 8% by covering analysts. The deal was originally modeled as $1.2B all-debt financed at 5% pre-tax against a target earnings yield of 9% (25% tax rate). Recompute the after-tax spread before and after these changes, and explain what specific contractual protections (from the process and defenses material) the acquirer should have negotiated at signing to guard against exactly this scenario.
- A target board adopts a poison pill and a staggered board in response to an unsolicited bid at a 20% premium. The acquirer's model shows the deal is only accretive up to a 35% premium given current financing and no synergies credited. Walk through how you would advise the acquirer to respond, including how a go-shop-like negotiated outcome, a proxy fight, and a raised bid with newly credited synergies would each change the price ceiling you calculated, and which path you would recommend and why.
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Running the deal: process and defense