M&A Fundamentals: The Complete Guide (2026) | Accretion/Dilution, Synergies & Deal Process
Master M&A fundamentals for finance interviews. Learn accretion/dilution analysis, synergies, deal structure, and the end-to-end M&A process.
Updated for 2026. Mergers & Acquisitions is the highest-profile work in investment banking and a core skill for private equity and corporate development roles. M&A combines valuation, financial modeling, deal structuring, negotiation, and project management.
This guide covers everything you need to know for M&A interviews: accretion/dilution analysis, synergies, payment methods, deal structures, and the end-to-end M&A process.
What is M&A? (And why companies do deals)
M&A is when one company acquires or merges with another company. But why?
Strategic Rationales for M&A
- Growth: Faster than organic growth (buy market share, customers, products)
- Synergies: 1+1=3 (cost reductions, revenue opportunities)
- Consolidation: Gain scale, reduce competition
- Capabilities: Acquire technology, talent, IP
- Diversification: Enter new markets or products
- Financial Engineering: Tax benefits, arbitrage opportunities
The M&A Paradox
70% of M&A deals fail to create shareholder value for the acquirer. Why? Overpaying, poor integration, culture clashes, and unrealized synergies. Yet companies keep doing deals. Understanding both the upside AND the pitfalls is crucial.
Types of M&A Transactions
M&A Transaction Types
| Term | Definition | Note |
|---|---|---|
| Merger | Two companies combine into one new entity | Usually between equals (e.g., Daimler-Benz + Chrysler) |
| Acquisition | One company buys another (target ceases to exist or becomes subsidiary) | Most common type (e.g., Facebook acquiring Instagram) |
| Asset Purchase | Buyer acquires specific assets, not the entire company | Allows cherry-picking assets and avoiding liabilities |
| Stock Purchase | Buyer acquires target's shares | Buyer assumes all assets and liabilities |
| Tender Offer | Public offer to buy shares directly from shareholders | Common in hostile takeovers |
| Management Buyout (MBO) | Management team buys the company (often with PE backing) | Usually with significant leverage (LBO) |
Accretion / Dilution Analysis (The #1 M&A Interview Question)
Accretion/Dilution analysis answers: "Will this deal increase or decrease the acquirer's EPS?"
Pro Forma EPS = (Acquirer Net Income + Target Net Income + Synergies - New Interest Expense) / (Acquirer Shares + New Shares Issued)If Pro Forma EPS > Current EPS, the deal is ACCRETIVE. If Pro Forma EPS < Current EPS, the deal is DILUTIVE.
The Key Intuition
For an all-stock deal with no synergies:
- If Acquirer P/E > Target P/E → ACCRETIVE
- If Acquirer P/E < Target P/E → DILUTIVE
Why? You're buying earnings. If you're buying at a LOWER multiple (lower P/E) than your stock trades at, you're getting earnings "cheaper" than your market values them.
Real World Context
Public company CEOs obsess over accretion/dilution because Wall Street cares about EPS. But being accretive doesn't mean the deal creates value! You can pay too much and still be accretive if synergies are high enough.
Test Yourself
Interview Question
Acquirer has P/E of 20x, Target has P/E of 15x. The deal is all-stock with no synergies. What happens to the Acquirer's EPS?
Cash vs Stock vs Mixed Consideration
Payment Method Impact on Accretion/Dilution
| Term | Definition | Note |
|---|---|---|
| 100% Cash | More likely accretive (no share dilution) | Requires available cash or debt capacity |
| 100% Stock | More likely dilutive (share dilution) | Preserves cash |
| Mixed | Balanced approach | Most common in practice |
Synergies: The Math That Makes Deals Work
Synergies are the additional value created by combining two companies. Without synergies, M&A is just paying a control premium (usually 20-40%) with no economic justification.
Types of Synergies
1. Cost Synergies (More Reliable)
- Revenue-related: Consolidate sales teams, eliminate duplicate marketing
- COGS-related: Supplier consolidation, volume discounts, manufacturing efficiency
- SG&A-related: Eliminate duplicate headquarters, back-office functions
- Technology: Consolidate IT systems, eliminate duplicate software licenses
2. Revenue Synergies (Less Reliable, Often Discounted)
- Cross-selling: Sell Target products to Acquirer customers (and vice versa)
- Geographic expansion: Leverage combined distribution network
- Product bundling: Sell combined products for premium pricing
- Reduced customer churn: Better product/service from combined entity
Interview Pro Tip
Cost synergies are typically realized at 70-80% of projections. Revenue synergies are typically realized at 30-50% or not at all. Buyers often overestimate revenue synergies, which is why deals underperform.
Test Yourself
Interview Question
Which of the following is a REVENUE synergy (not a cost synergy)?
Quantifying Synergies
PV of Synergies = Σ [Annual Synergies × (1 - Tax Rate) / (1 + WACC)^t]Synergies take time to realize. Model them ramping up over 2-3 years, then run to perpetuity.
Key modeling assumptions:
- Implementation costs (one-time charges, severance, integration consultants)
- Timing (Year 1: 30%, Year 2: 70%, Year 3: 100% is common)
- Probability haircut (discount revenue synergies more than cost synergies)
Payment Methods: Cash vs Stock
How you pay for a deal matters — it affects accounting treatment, taxes, risk sharing, and dilution.
Cash Deals
Pros:
- Clean and certain for target shareholders
- More likely to be accretive (no share dilution)
- Faster close (no shareholder vote required)
Cons:
- Requires available cash or debt capacity
- Acquirer bears 100% of downside risk
- May trigger immediate tax for target shareholders
Stock Deals
Pros:
- Preserves cash
- Target shareholders share in upside (useful when pitching transformative deal)
- Can be tax-free for target shareholders (if structured properly)
Cons:
- Dilutes existing shareholders
- Price risk (acquirer's stock price can move between announcement and close)
- Requires shareholder approval (takes longer)
Test Yourself
Interview Question
An acquirer believes the target is undervalued but has limited cash. Their own stock is trading at a high valuation. What payment method makes the MOST sense?
Fixed vs Floating Exchange Ratio (Stock Deals)
Stock Deal Exchange Mechanisms
| Term | Definition | Note |
|---|---|---|
| Fixed Share Exchange | Target gets fixed # of shares | Target bears stock price risk |
| Fixed Value / Floating Exchange | Target gets fixed $ value in stock | Acquirer bears stock price risk |
| Collar | Exchange ratio floats within a band | Risk shared within collar limits |
Deal Structure: Asset vs Stock Purchase
Beyond payment method, you must choose the legal structure of the transaction. This has major tax, liability, and operational implications.
Asset Purchase (338 Election in US)
Buyer Perspective:
- ✅ Select specific assets and liabilities (avoid unwanted liabilities)
- ✅ Step-up tax basis (depreciation shield going forward)
- ❌ Must re-negotiate contracts and licenses (no automatic transfer)
- ❌ More complex transaction
Seller Perspective:
- ❌ Double taxation (corporate level + shareholder level)
- ❌ Left with unwanted liabilities
Stock Purchase (or Merger)
Buyer Perspective:
- ✅ Simpler transaction
- ✅ Contracts/licenses transfer automatically
- ❌ Assumes ALL liabilities (including hidden/contingent ones)
- ❌ No step-up in tax basis (unless 338(h)(10) election)
Seller Perspective:
- ✅ Single level of taxation
- ✅ Clean exit
Test Yourself
Interview Question
Acquirer wants to buy Target's core business but avoid assuming Target's pension liabilities. What deal structure is MOST appropriate?
The M&A Process (Sell-Side Perspective)
Understanding the process is crucial for IB interviews. Here's the typical sequence for a banker-led sell-side M&A process:
Sell-Side M&A Process (Auction)
Phase 1: Preparation (4-6 weeks)
Banker prepares: Confidential Information Memorandum (CIM), management presentation, data room, financial model. Identify buyer universe and create teaser (anonymous 1-pager).
Phase 2: Marketing (2-3 weeks)
Distribute teaser to potential buyers. Interested parties sign NDA. Send full CIM. Answer initial questions.
Phase 3: First Round Bids (3-4 weeks)
Buyers submit non-binding Indications of Interest (IOIs) with preliminary valuation range. Seller narrows to 3-5 bidders for 'second round.'
Phase 4: Management Presentations (2-3 weeks)
Finalist bidders meet management, tour facilities, ask detailed questions. Confirm strategic fit.
Phase 5: Due Diligence (4-6 weeks)
Buyers conduct confirmatory due diligence: financial (quality of earnings), legal, operational, commercial, IT/tech. Access to data room and management Q&A.
Phase 6: Final Bids (1-2 weeks)
Buyers submit binding offers with draft purchase agreements. Seller selects winner (usually highest price + certainty + terms).
Phase 7: Negotiation & Signing (2-4 weeks)
Negotiate definitive purchase agreement. Key terms: price, reps & warranties, indemnities, conditions to close. Sign agreement.
Phase 8: Close (1-3 months post-signing)
Obtain regulatory approvals (antitrust, industry-specific). Satisfy conditions precedent. Wire funds and transfer ownership. Announce publicly.
Total Timeline
A typical sell-side M&A process takes 4-7 months from engagement to close. Complex deals (regulatory issues, cross-border, large size) can take 12+ months.
Test Yourself
Interview Question
In a typical sell-side M&A process, what usually happens AFTER management presentations but BEFORE final bids?
M&A Valuation (Premium Analysis)
In M&A, you typically pay a control premium above the current trading price. Why? Because you're buying control rights, synergies, and the ability to change strategy.
Control Premium = (Offer Price - Unaffected Stock Price) / Unaffected Stock PriceTypical control premiums: 20-40%. Higher for strategic buyers with strong synergies.
How to Think About Valuation in M&A
- Floor: Standalone Value
What is the target worth on its own? (DCF, trading comps) - Market: Trading Price + Typical Premium
Current price + 25-30% control premium - Ceiling: Value to Buyer
Standalone value + PV of synergies - Integration costs
Warning
The "winner's curse" in M&A auctions: The buyer who wins is often the one who overestimated synergies or paid the most. Discipline around valuation is crucial.
The Merger Model (Step-by-Step)
A merger model is used to calculate accretion/dilution. Here's the structure:
Section 1: Transaction Assumptions
- Purchase price ($/share or EV multiple)
- Payment method (cash/stock/mixed)
- Sources of funds (cash, debt, stock)
- Transaction fees and expenses
Section 2: Purchase Price Allocation
- Goodwill and intangibles creation
- Step-up in basis (asset purchase)
- Deferred tax impacts
Section 3: Pro Forma Balance Sheet
- Combine acquirer + target balance sheets
- Adjust for purchase accounting
- Add new debt and/or equity
Section 4: Pro Forma Income Statement
- Combine acquirer + target P&Ls
- Add synergies (phased in over time)
- Adjust for new D&A (from step-up)
- Adjust for new interest expense (from new debt)
Section 5: Accretion / Dilution Analysis
- Calculate Pro Forma EPS
- Compare to Standalone EPS
- Show accretion/dilution % by year
- Run sensitivities on purchase price and synergies
Common Interview Question
"Walk me through a merger model."
Answer: "I'd start with transaction assumptions — price and consideration. Then combine the balance sheets and income statements, adjusting for purchase accounting. Add synergies to the combined income statement and calculate new interest expense from any debt raised. Finally, calculate Pro Forma EPS and compare to standalone to determine accretion/dilution."
Common M&A Interview Questions
"Walk me through a merger model"
Answer structure above. Focus on: purchase price → combination → adjustments → Pro Forma EPS.
"What makes a deal accretive or dilutive?"
Answer: "In an all-stock deal with no synergies, if the acquirer has a higher P/E than the target, the deal is accretive. If the acquirer has a lower P/E, it's dilutive. With cash, it depends on the cost of debt vs the earnings yield of the target. Synergies always help accretion."
"Why do companies pay a control premium?"
Answer: "The premium reflects: (1) control rights and ability to change strategy, (2) expected synergies, (3) scarcity value in competitive auctions, and (4) the fact that minority shareholders can't realize these benefits themselves."
"Asset purchase or stock purchase?"
Answer: "It depends. Asset purchase lets you pick assets and avoid liabilities, plus you get a tax step-up. But it's more complex. Stock purchase is simpler and contracts transfer automatically, but you assume all liabilities. Buyers generally prefer asset purchases; sellers prefer stock purchases."
"What are the key risks in M&A?"
Answer: "Overpaying (winner's curse), integration failure, culture clashes, key talent leaving, customer attrition, unrealized synergies, regulatory blocks, and hidden liabilities discovered post-close."
Key M&A Formulas (Memorize These)
Pro Forma EPS = (Acquirer NI + Target NI + Synergies - New Interest) / (Acquirer Shares + New Shares)Core accretion/dilution calculation. Accretive if Pro Forma EPS > Current EPS.
Synergies (After-Tax) = Annual Synergies × (1 - Tax Rate)Always model synergies after-tax and phased in over 2-3 years.
New Shares Issued = (Stock Consideration) / Acquirer Stock PriceFor stock deals, calculate dilution from new shares issued to target shareholders.
Control Premium = (Offer Price - Unaffected Price) / Unaffected PriceTypical premiums: 20-40%. Measure from unaffected stock price (before rumors).
Exchange Ratio = Target Price per Share / Acquirer Price per ShareIn stock deals, how many acquirer shares does each target share convert into?
3-Week M&A Mastery Plan
Your M&A Interview Prep Timeline
Week 1: Accretion/Dilution Mechanics
Master the Pro Forma EPS formula. Practice 50 quick accretion/dilution questions. Understand the P/E relationship. Build a simple merger model from scratch.
Week 2: Synergies & Deal Structures
Memorize types of synergies (cost vs revenue). Learn asset vs stock purchase trade-offs. Study payment method considerations (cash vs stock). Practice explaining deal rationale.
Week 3: Process & Integration
Memorize the 8-step sell-side M&A process. Study key deal terms (reps & warranties, MAC clauses, indemnities). Run 2 mock interviews. Do 100+ M&A drill questions.
Related Resources
Continue your M&A interview prep with these specialized guides:
- Accretion/Dilution Explained — Deep dive on EPS impact
- M&A Deal Process Walkthrough — Step-by-step process
- M&A Interview Questions: Complete Guide — Common interview questions
- Company Valuation Methods — Valuation foundation for M&A
FAQ
What's the most important M&A concept for interviews?
Accretion/dilution analysis. You MUST be able to calculate Pro Forma EPS and explain what drives accretion. This is tested in almost every IB interview.
Do I need to build a full merger model for interviews?
For IB modeling tests, yes — you should be able to build a merger model from scratch in 2-3 hours. For verbal interviews, you need to know the key components and be able to walk through the logic.
Why do most M&A deals fail to create value?
Common reasons: (1) Overpaying in competitive auctions, (2) Overestimating synergies (especially revenue synergies), (3) Integration execution failures, (4) Culture clashes, (5) Key talent/customers leaving.
Stock vs cash — which is better?
It depends. Cash is cleaner and more certain for sellers. Stock preserves acquirer's cash and lets target shareholders participate in upside. Use stock when your stock is "expensive" (high valuation) and you want to share risk. Use cash when you have strong conviction and want to capture 100% of upside.
Key Takeaways
Key Takeaway
- Accretion/Dilution is the #1 interview concept — Pro Forma EPS vs Standalone EPS
- Synergies make deals work, but they're often overestimated. Cost synergies are more reliable than revenue synergies
- Payment method matters: Cash = certainty, Stock = share risk/upside. Use stock when your stock is expensive.
- Deal structure (asset vs stock) has major tax and liability implications
- The M&A process takes 4-7 months from engagement to close, with multiple rounds of bids and due diligence
- Control premium reflects synergies, control rights, and competitive dynamics (typically 20-40%)