When creating a merger model, what is the first step?

The correct first step when creating a merger model is to make assumptions about the acquisition. This is crucial because the assumptions set the foundation for the entire model, influencing projections and valuations that will follow. It includes determining the purchase price, the method of payment (cash, stock, or both), and the structure of the deal, which all play a significant role in how the merger will impact both companies financially and operationally.

By establishing these assumptions upfront, analysts can better understand how the merger will add value, what synergies can be anticipated, and how it will affect the combined company's financial performance. This groundwork is essential for all subsequent steps, including projecting income statements, determining valuations, and eventually combining the income statements of the two companies effectively.