M&A Interview Questions - Can You Answer All Four?
I have a set of M&A interview questions I like to ask. In my career, I've only had two analyst / associate candidates answer all four levels correctly without coaching. Most people can get Level 1 and sometimes 2. Fewer get Level 3 or 4 even with coaching.
Silver Banana's for good solutions (or even attempts) - thought process is more important than answer.
Company A acquires Company B. Assume all numbers below are inclusive of premium and synergies.
Level 1
Company A has PE of 10 and company B has PE of 8.
In an equity-swap deal, is the transaction Accretive or dilutive?
Level 2
This is to break the people who read the Vault guide and quote the "cheaper earnings" answer / shortcut
Company A uses debt which has an after tax kd of 5% to acquire B.
A. Is the deal still (Accretive / dilutive) like in Level 1 question? More or less?
B. What after tax kd would make the deal approximately break even from an accretion perspective?
Level 3
This question requires a framework. If you blurt out a number: A. I bet I know what answer you're going to blurt out and it's wrong and B. you need to show me you put more thought into it regardless: Right number with no backup is the wrong number.
Assume the companies are the same size (read: same EV) and other reasonable simplifying assumptions.
A. Without doing any math, what are some reasonable boundaries for the PE ratio of the PF entity?
B. How Accretive is the deal in Level 1 as a %? Is your PF PE ratio within the bounds you expected?
Level 4
If you have the framework for Level 3, chances are you can probably get this one too
Assume company A is twice the size of company B (read: EV A = EV B x 2).
A. Without doing any math is the deal more Accretive or less Accretive? What are the PE bounds in this case?
B. Now do the math and tell me exactly how Accretive it is. Does your answer make sense?