Merger and Acquisition

Finance is a wide field covering insurance, retail banking, investment banking and other financial services. Merger and Acquisition is one of the major aspects of corporate finance world. Here are the Interview questions that will help you to prepare for M&A role.

Q.1 How do you value a company as a professional?
Sample Answer - Even though it depends on the industry and situation of the company, the primary key lies in the discounting the future earnings to the present value. This can be DCFF, DCFE or DDM depending upon the industry of company.
Q.2 Given the case of an acquisition, what would you consider – the equity value or the enterprise value?
Sample Answer - Equity price reflects the market value and fundamental value of company, it is essential to consider the enterprise value in case of acquisition. Since the enterprise value is an indicator of the company as a whole.
Q.3 Can an organiation have a negative enterprise value?
Sample Answer - Yes, a organization can surely have negative value. Given a the company is on the brink of bankruptcy, it will have negative enterprise value. Added to this, if the company has large cash reserves, enterprise value will swing to the negative side.
Q.4 Given the FCFF, calculate the FCFE?
Sample Answer - FCFF+ Tax on EBIT- Actual tax paid- Interest on cash (net of tax)- Interest on debt+ Repayment of debt = FCFE
Q.5 What discount rates will you go about using?
Sample Answer - Let us suppose if you are doing a DCFF, then you would use a WACC, since it accounts for both Debt and Equity capital and the cash flows you are discounting are "pre-financing" and do not already include interest expense But if you are doing a DCFE or a DDM, then you would use just the Cost of Equity since the cost of debt has already been taken into account in the cash flows that you are discounting.
Q.6 Can you spot the difference between asset beta and equity beta?
The asset beta is the unlevered beta which holds no risk to the leverage which the asset may hold. On the other side, when the beta is calculated by looking into the beta of other company, you obtain your levered beta. The mere thing left to do is to de-lever the beta.
Q.7 How's a merger different from an acquisition?
In any M&A deal there’s always a buyer and a seller – the difference between “merger” and “acquisition” is more semantic than anything. In an acquisition the buyer is significantly larger, whereas in a merger the companies are close to the same size.
Q.8 What is a co generic merger?
Generic means in simple words – generally meaning the same – thus, co generic merger is when two companies belonging to the same/ related industry – but producing/ dealing in different products merging to form a company.
Lets say, a professional or producer bats for the game of cricket – and a company producing only baseball bats merge to go global with their bats.
Q.9 What is a reverse merger?
It is when a private company – to automatically become a publicly traded company, it buys a public company– and it does not have to undertake initial public offer.
Sort of like a roundabout way to become a public company without the actual hassles and costs of IPO and other initial formalities that a public company has to compulsorily adhere to.
Q.10 Why would an acquisition be dilutive?
An acquisition is dilutive if the additional amount of Net Income which the seller contributes is not sufficient to offset the buyer’s foregone interest on cash, the effects of issuing additional shares and an additional interest paid on debt. Also, an acquisition effects – such as amortization of intangibles – can also make an acquisition dilutive.
Q.11 A company with a higher p/e acquires one with a lower p/e – state whether is this accretive or dilutive?
You can’t tell this unless you also know that it’s an all-stock deal. If it’s an all-cash or all-debt deal, the P/E multiples of the buyer and seller don’t matter because no stock is being issued. Sure, generally earnings more for less is good and is more likely to be accretive but there’s no hard-and-fast rule unless it’s an all-stock deal.
Q.12 Why would a strategic acquirer typically be willing to pay more for a company when compared to a private equity firm would?
Because unless it combines the company with a complementary portfolio company the strategic acquirer can realize revenue and cost synergies that the private equity firm cannot. Those synergies boost the effective valuation for the target company.
Q.13 In an acquisition why do goodwill & other intangibles get created?
The value over the “fair market value” of the seller that the buyer has paid are represented by these. By subtracting the book value of a company from its equity purchase price you calculate the number. More specifically, things like the value of customer relationships, brand names and intellectual property – valuable, are represented by Goodwill and other intangibles, but not true financial Assets that show up on the Balance Sheet.
Q.14 In merger models, how are the synergies used?
Revenue Synergies: Normally for the combined company you add these to the Revenue figure and then assume a certain margin on the Revenue – this additional Revenue then flows through the rest of the combined Income Statement. Cost Synergies: Normally by this amount you reduce the combined COGS or Operating Expenses, which in turn boosts the combined Pre-Tax Income and thus Net Income, raising the EPS and making the deal more accretive.
Q.15 What is a successful acquisition?
A successful acquisition is the one that increases the market price of the acquirer's stock over what it would have been without the acquisition. Acquirers in the most successful deals have specific, well-articulated value creation ideas going in. For less successful deals, the strategic rationales—such as pursuing international scale, filling portfolio gaps, or building a third leg of the portfolio—tend to be vague.
Q.16 What is a vertical merger?
If you see the chain of the distribution – there is a producer – then the wholesaler/ agent – retailer – buyer. If a Oil producing company purchases the company responsible for distributing its products – then it is vertical merger. Or a Jet manufacturing company purchases the company producing the tyres is uses on its Jets.
Q.17 What does it indicate if a company "go private" ?
Leveraged Buyout (LBO) indicate if a company "go private". A leveraged buyout (LBO) is the acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition.
Q.18 What is horizontal merger?
Two companies which belong to the same industry merge is known to be a horizontal merger– for instance if Airtel and Reliance merge! They belong to the same industry = telecommunications.
Q.19 When restructuring should be undertaken?
The restructuring of a firm should be undertaken in case the restructuring is expected to create value for shareholders. Restructuring is the corporate management term for the act of reorganizing the legal, ownership, operational, or other structures of a company for the purpose of making it more profitable, or better organized for its present needs.
Q.20 What Is a target valuation?
Target valuation is the valuation of the ‘target’ company (the one that will be bought) by the acquiring company i.e. the company wanting to buy.
It is the value of the target company as a whole – defined in financial terms – the worth of the company at present and the benefit it will continue giving to the acquiring company in the future.
It is the very first thing one sees in any M & A.
Q.21 "Effective" control of a firm requires approximately how much percent of ownership?
"Effective" control of a firm requires approximately 20% ownership.
Q.22 Through what you'll know that an acquisition is dilutive?
If your current shareholders’ earnings per share go down after the transaction, this would be dilutive. While, it would be accretive if your current shareholders’ earnings per share go up. It is best to look at the effects over a number of years; else, this could be a bit short sighted.
Q.23 In which type of merger a completely new firm is built and both the acquiring and the acquired firms cease to exist?
Consolidation or amalgamation is the merger and acquisition of many smaller companies into much larger ones. It is a merger in which a completely new firm is built and both the acquiring and the acquired firms cease to exist.
Q.24 Can a company hold a negative enterprise value?
Yes, of-course it can. If the company is on the verge of bankruptcy, it will have negative enterprise value. Added to this, if the company has large cash reserves, enterprise value will swing to the negative side.
Q.25 If Microsoft were to acquire U.S. Airways, the acquisition would be classified as which type of merger?
A conglomerate merger is a merger between firms that are involved in totally unrelated business activities. A conglomerate merger is "any merger that is not horizontal or vertical; in general, it is the combination of firms in different industries or firms operating in different geographic areas".
Q.26 In case of an acquisition, what would be your choice- the equity value or the enterprise value?
While equity price reflects the market value and fundamental value of company, in case of acquisition it is essential to consider the enterprise value. This is because the enterprise value is an indicator of the company as a whole.
Q.27 Which method of funding, is a method of providing structured working capital and term loans that are secured by accounts receivable, inventory, machinery, equipments or real estate?
Asset based funding, is a method of providing structured working capital and term loans that are secured by accounts receivable, inventory, machinery, equipments or real estate. An asset based loan (ABL) is a type of business financing that is secured by company assets.
Q.28 How do you value a company?
While, it depends on the industry and situation of the company, basic key lies in the discounting the future earnings to the present value.
Depending upon the industry of company, it can be DCFF, DCFE or DDM.
Q.29 In an asset purchase could you get dtls and dates?
I don't think so, because in an asset purchase the book basis of assets always matches the tax basis. They get created in a stock purchase because the book values of assets are written up or written down, while the tax values are not.
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