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 What's the difference between a merger and an acquisition?
In a merger, two companies combine to form a new entity, while in an acquisition, one company purchases another.
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Q.2 What is the primary goal of M&A?
The primary goals are to increase shareholder value, achieve growth, and gain a competitive advantage.
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Q.3 What are the different types of M&A transactions?
They include horizontal, vertical, conglomerate, friendly, and hostile M&A.
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Q.4 What is due diligence in M&A?
Due diligence is a comprehensive investigation to assess the target company's financial, legal, and operational aspects.
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Q.5 Explain the term "synergy" in M&A.
Synergy is the idea that the combined company is more valuable than the sum of its individual parts.
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Q.6 What is a Letter of Intent (LOI)?
An LOI is a preliminary agreement outlining the key terms and conditions of an M&A deal.
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Q.7 What is a hostile takeover?
It's an acquisition that occurs without the target company's consent or cooperation.
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Q.8 What is the role of investment bankers in M&A?
They help identify targets, negotiate deals, and raise capital for M&A transactions.
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Q.9 What are some common M&A valuation methods?
Methods include DCF analysis, comparable company analysis, and precedent transactions analysis.
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Q.10 Define goodwill in M&A accounting.
Goodwill represents the premium paid for a company over its net assets' fair market value.
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Q.11 What is the "golden parachute" in M&A?
It's a compensation package for executives in case of job loss after an acquisition.
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Q.12 Explain the term "earnouts" in M&A.
Earnouts are contingent payments based on the target company achieving specific performance milestones.
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Q.13 What is the Hart-Scott-Rodino Act?
It's a U.S. law that requires companies to report large M&A deals to the Federal Trade Commission (FTC).
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Q.14 What is a divestiture in M&A?
A divestiture involves selling off a portion of a company's assets, subsidiaries, or divisions.
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Q.15 Describe the concept of a "poison pill" in M&A.
A poison pill is a defensive strategy used by target companies to deter hostile takeovers.
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Q.16 What is a stock purchase vs. an asset purchase in M&A?
In a stock purchase, the buyer acquires ownership of the target company, while an asset purchase involves buying specific assets.
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Q.17 What are the advantages of a stock purchase?
It may come with tax benefits and fewer liabilities for the buyer.
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Q.18 What are the advantages of an asset purchase?
The buyer can select specific assets and avoid unwanted liabilities.
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Q.19 What is a reverse merger?
It's when a private company acquires a public company to go public without an IPO.
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Q.20 Explain the role of antitrust laws in M&A.
Antitrust laws prevent monopolies and regulate competition in M&A deals.
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Q.21 What is a non-compete clause in M&A agreements?
It restricts sellers or key employees from competing with the buyer for a specified period.
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Q.22 What is the "breakup fee" in M&A?
It's a fee paid by the target company to the acquirer if the deal fails to go through.
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Q.23 What is the role of the board of directors in M&A?
They approve or reject M&A proposals on behalf of shareholders.
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Q.24 What are the steps involved in an M&A process?
Steps include strategic planning, target identification, due diligence, negotiation, and integration.
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Q.25 What is a cash merger vs. a stock merger?
In a cash merger, shareholders receive cash for their shares, while in a stock merger, they get shares of the acquiring company.
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Q.26 What is a spin-off in M&A?
It's when a company separates a subsidiary or division into an independent entity or sells it.
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Q.27 Explain the concept of a "white knight" in M&A.
A white knight is a friendly acquirer that helps fend off a hostile takeover bid.
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Q.28 What are the key financial statements used in M&A analysis?
Income statement, balance sheet, and cash flow statement.
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Q.29 What is the role of M&A attorneys?
They handle legal aspects, contracts, and regulatory compliance in M&A transactions.
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Q.30 How do you calculate the purchase price in M&A?
Purchase price = equity value + assumed debt - excess cash - non-controlling interests.
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Q.31 What is EBITDA and why is it important in M&A?
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization; it's a key measure of a company's operating performance.
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Q.32 What is a memorandum of understanding (MOU) in M&A?
It's a preliminary agreement outlining the basic terms and conditions of an M&A deal.
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Q.33 Explain the term "integration" in M&A.
Integration is the process of combining the operations and functions of the merged companies efficiently.
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Q.34 What are some common M&A risks?
Risks include cultural clashes, integration challenges, regulatory hurdles, and financial overextension.
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Q.35 What is a "no-shop" clause in M&A agreements?
It prevents the target company from actively seeking other buyers during the negotiation period.
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Q.36 What is a "MAC clause" in M&A agreements?
It allows the buyer to back out of the deal if a Material Adverse Change occurs in the target company.
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Q.37 Explain the concept of "acquisition financing."
It involves obtaining the necessary funds to complete an M&A deal, often through loans or equity issuance.
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Q.38 What is a private equity buyout?
It's when a private equity firm acquires a company, often with the goal of improving its operations and value.
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Q.39 What is the role of the M&A due diligence team?
They investigate the target company's finances, contracts, legal issues, and operations in detail.
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Q.40 How can a company finance an M&A deal?
Financing options include cash reserves, debt, equity issuance, or a combination of these.
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Q.41 What is the role of the M&A integration team?
They plan and execute the post-merger integration process to ensure a smooth transition.
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Q.42 What is the "lock-up agreement" in M&A?
It's an agreement where key shareholders commit to not selling their shares for a specified period after the deal.
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Q.43 What is a due diligence checklist in M&A?
It's a detailed list of documents and information needed to assess the target company's suitability for acquisition.
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Q.44 What is the role of the Securities and Exchange Commission (SEC) in M&A?
They regulate and oversee disclosure requirements for public companies involved in M&A transactions.
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Q.45 Explain the concept of "EBIT" in M&A.
EBIT stands for Earnings Before Interest and Taxes and is a measure of a company's operating profitability.
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Q.46 What is a "friendly" M&A transaction?
It's an M&A deal where both the acquiring and target companies are in agreement and cooperate willingly.
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Q.47 What is the role of a financial advisor in M&A?
Financial advisors provide guidance on the financial aspects of M&A deals, including valuation and pricing.
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Q.48 What is a "covenant" in M&A financing?
Covenants are financial and operational conditions that borrowers must meet when using debt to finance an acquisition.
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Q.49 What is the "lock-up option" in M&A?
It's an option that allows key employees or shareholders to sell their shares to the acquirer at a predetermined price.
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Q.50 What is the role of the Federal Trade Commission (FTC) in M&A?
The FTC reviews M&A deals to ensure they do not violate antitrust laws and harm competition.
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Q.51 What is the significance of a confidentiality agreement in M&A?
It protects sensitive information during the due diligence process and negotiations.
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Q.52 What is a "valuation gap" in M&A?
A valuation gap occurs when the buyer's and seller's price expectations for the target company differ significantly.
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Q.53 How does a company communicate an M&A deal to its employees?
Communication is crucial, and typically, employees are informed once the deal is finalized to minimize uncertainty.
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Q.54 What is a "hostile tender offer" in M&A?
It's a direct bid to acquire a company's shares from its shareholders, bypassing the target company's board.
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Q.55 What is the role of an escrow account in M&A?
It holds a portion of the purchase price until certain conditions or obligations are met post-closing.
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Q.56 Explain the concept of "EBITDAR" in M&A.
EBITDAR stands for Earnings Before Interest, Taxes, Depreciation, Amortization, and Rent, and includes rent expenses in the calculation.
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Q.57 What is a "standstill agreement" in M&A?
It restricts an acquiring company from increasing its ownership stake or launching a hostile takeover for a specified period.
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Q.58 What is the role of a fairness opinion in M&A?
A fairness opinion is a third-party assessment of whether the terms of an M&A deal are fair to shareholders.
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Q.59 What is a "PIPE" transaction in M&A?
A PIPE (Private Investment in Public Equity) transaction involves private investors buying shares in a public company.
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Q.60 What is a "squeeze-out" in M&A?
A squeeze-out is a legal process that allows majority shareholders to force minority shareholders to sell their shares.
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Q.61 What is a "locked-box" mechanism in M&A?
It's a pricing mechanism that sets the purchase price based on the target company's historical financials at a specific date.
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Q.62 What is a "working capital adjustment" in M&A?
It's an adjustment to the purchase price based on the target company's working capital at closing.
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Q.63 What is the role of an M&A integration manager?
They oversee the day-to-day integration process and ensure that the merger's objectives are met.
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Q.64 Explain the term "earnest money" in M&A.
Earnest money is a deposit made by the buyer to demonstrate commitment to the transaction.
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Q.65 What is a "strategic buyer" in M&A?
A strategic buyer is a company that acquires another company to gain a competitive advantage or expand its operations.
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Q.66 What is a "financial buyer" in M&A?
A financial buyer, such as a private equity firm, acquires companies with the goal of increasing their value and profitability.
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Q.67 What is a "collar" in M&A financing?
A collar is a range of acceptable interest rates or other financial terms for a debt financing arrangement.
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Q.68 What is the "50% rule" in M&A?
The 50% rule states that if the buyer acquires over 50% of a target's voting shares, they gain control over the target.
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Q.69 What is the role of the M&A integration office?
The integration office oversees and coordinates various aspects of the integration process, ensuring alignment with strategic goals.
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Q.70 What is the role of a "proxy statement" in M&A?
A proxy statement provides shareholders with information about an upcoming vote on an M&A deal.
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Q.71 Explain the concept of "retention bonuses" in M&A.
Retention bonuses are financial incentives offered to key employees to encourage them to stay with the company post-merger.
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Q.72 What is the "materiality scrape" provision in M&A?
It allows the buyer to adjust the purchase price if previously undisclosed material information comes to light.
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Q.73 What is the "going concern" concept in M&A?
A going concern assumption assumes that the target company will continue operating normally after the acquisition.
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Q.74 What is a "second request" in the context of antitrust review?
A second request is an extensive information request made by antitrust authorities during their review of an M&A transaction.
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Q.75 What is the role of the M&A integration steering committee?
The steering committee provides strategic direction and oversight for the integration process.
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Q.76 What is a "roll-up" in M&A?
A roll-up is a series of acquisitions in the same industry or sector to create a larger, more competitive entity.
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Q.77 What is a "cross-border merger" in M&A?
It's an M&A deal involving companies from different countries or jurisdictions.
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Q.78 What is the role of the M&A synergy team?
The synergy team identifies and quantifies potential cost savings and revenue enhancements from the merger.
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Q.79 What is a "put option" in M&A?
A put option allows shareholders to sell their shares to the acquirer at a predetermined price within a specified period.
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Q.80 What is the role of the M&A communications team?
They manage internal and external communications to ensure a cohesive message is conveyed during the merger process.
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Q.81 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.
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Q.82 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.
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Q.83 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.
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Q.84 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
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Q.85 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.
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Q.86 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.
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Q.87 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.
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Q.88 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.
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Q.89 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.
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Q.90 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.
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Q.91 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.
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Q.92 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.
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Q.93 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.
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Q.94 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.
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Q.95 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.
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Q.96 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.
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Q.97 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.
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Q.98 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.
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Q.99 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.
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Q.100 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.
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Q.101 "Effective" control of a firm requires approximately how much percent of ownership?
"Effective" control of a firm requires approximately 20% ownership.
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Q.102 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.
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Q.103 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.
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Q.104 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.
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Q.105 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".
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Q.106 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.
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Q.107 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.
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Q.108 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.
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Q.109 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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Q.110 What is M&A?
M&A refers to the process of combining two or more companies to form a single entity or achieve strategic goals.
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