Base case: Target trades at $40/share × 50M shares = $2,000M standalone equity value, $100M net income (P/E 20). Acquirer trades at $120/share × 50M shares = $6,000M, $300M net income.
Offer price = TargetPrice0 × (1 + premium)
Premium paid = TargetValue0 × premium
Synergy PV = AnnualSynergy / (WACC − g), g = 2% perpetual growth
Net value created (to acquirer) = Synergy PV − Premium paid
New shares issued = stock% × TotalConsideration / AcquirerPrice0
After-tax financing cost = cash% × TotalConsideration × 5% × (1 − tax)
Combined net income = AcquirerNI + TargetNI + AnnualSynergy×(1−tax) − financing cost
Pro-forma EPS = Combined NI / (AcquirerShares + New shares)
Accretion/dilution = (Pro-forma EPS − Acquirer EPS0) / Acquirer EPS0
- Offer premium — how much above the target's current share price the acquirer bids; higher premium raises acceptance odds but destroys more value unless synergies cover it.
- Synergies — annual cost/revenue synergies discounted as a growing perpetuity at the WACC; this is the value the deal must create to justify the premium.
- Cash/stock mix — cash deals are financed with debt (fixed after-tax cost, no new shares); stock deals issue new acquirer shares, diluting existing holders but sharing risk with target shareholders.
- Target board acceptance — a logistic function of premium: boards typically expect at least ~20% before recommending a deal.
This is the same accretion/dilution and synergy-bridge math investment banks build in an M&A pitch book before a deal is announced — it is the first test of whether a merger is likely to create or destroy value for the acquirer's shareholders.