IB Interview Questions: M&A : Level 2 M&A Questions
1. If a company with a PE of 13x buys a company with a PE of 10x in an all-stock deal, is the deal accretive or dilutive?
The deal will be Accretive for the acquiring company because the value of its stock per dollar of earning is greater than that of the target company.
As a result, it will need to issue fewer proportional shares per dollar of earnings to buy out the Target company’s stock.
This is a question that many people simply memorize the answer to but can’t explain the ‘why’ behind the question.
The short story here is that the combined share counts of the company shrink in this type of deal (because the Acquirer’s stock is more valuable), but Net Income remains the same, so as a result, Earnings Per Share increases.
2. What are the typical structures for an M&A deal?
The three typical structures are asset acquisition, stock purchase, and merger.
3. What is an Acquihire?
An Acquihire is an acquisition of a target company with the primary goal of bringing in the target company’s team to work at the acquiring company.
4. What is an earnout?
When a seller agrees to receive a portion of the purchase price in an acquisition based on the operating performance of the business following an acquisition.
Payment is typically based on achieving Revenue and/or EBITDA growth milestones over time.
5. Do sellers like/dislike earnouts? How about buyers?
Earnouts typically benefit the buyers instead of the sellers since they protect the buyer by implementing profitability requirements for the full payout to the seller.
6. What are the forms of consideration in an M&A deal and what are the implications of each?
The primary forms of consideration are Stock, Cash, and Debt.
Key Implications:
Stock – increases the post-deal share count.
Debt – creates new interest expense.
Cash – creates foregone interest income expense which reflects the missed interest that could have been earned on the cash used in the deal.
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