Mergers Acquisitions Interview Questions & Answers

Mergers Acquisitions Interview Questions

Mergers and acquisitions are proceedings in which the possession of companies, other business organizations, or their operating units are changed or integrate with other entities. Want to shift your career in mergers acquisitions? Looking for some interview questions in merger acquisition then we in wisdomjobs have provided you with the complete details about the Mergers acquisition interview question and answers. If you are familiar with mergers acquisitions concepts then there are various leading companies that offer job roles like HR Generalist, acquisition manager, senior executive talent acquisition, Technical Talent Acquisition Executives, Regional Acquisition Manager along with that there are many other roles too. One must work hard to clear any kind of interview, but in our site we made it very simplier.More details on Mergers acquisitions job visit our wisdomjobs mergers acquisition site page.

Mergers Acquisitions Interview Questions And Answers

Mergers Acquisitions Interview Questions
    1. Question 1. Walk Me Through A Basic Merger Model?

      Answer :

      “A merger model is used to analyze the financial profiles of 2 companies, the purchaseprice and how the purchase is made, and determines whether the buyer’s EPS increasesor decreases.

      Step 1 is making assumptions about the acquisition – the price and whether it was cash, stock or debt or some combination of those. Next, you determine the valuations and shares outstanding of the buyer and seller and project out an Income Statement for each one. Finally, you combine the Income Statements, adding up line items such as Revenue and Operating Expenses, and adjusting for Foregone Interest on Cash and Interest Paid onDebt in the Combined Pre-Tax Income line; you apply the buyer’s Tax Rate to get theCombined Net Income, and then divide by the new share count to determine thecombined EPS.”

    2. Question 2. What Is The Difference Between Asset Beta And Equity Beta?

      Answer :

      The asset beta is the unlevered beta which holds no risk to the leverage that 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.

    3. Question 3. What’s The Difference Between A Merger And An Acquisition?

      Answer :

      There’s always a buyer and a seller in any M&A deal – the difference between “merger” and “acquisition” is more semantic than anything. In a merger the companies are close to the same size, whereas in an acquisition the buyer is significantly larger.

    4. Question 4. Why Would A Company Want To Acquire Another Company?

      Answer :

      Several possible reasons:

      • The buyer wants to gain market share by buying a competitor.
      • The buyer needs to grow more quickly and sees an acquisition as a way to do that.
      • The buyer believes the seller is undervalued.
      • The buyer wants to acquire the seller’s customers so it can up-sell and cross-sell to
      • them.
      • The buyer thinks the seller has a critical technology, intellectual property or some
      • other “secret sauce” it can use to significantly enhance its business.
      • The buyer believes it can achieve significant synergies and therefore make the deal
      • accretive for its shareholders.

    5. Question 5. Which Body Governs Mergers And Acquisitions In India?

      Answer :

      There is no single governing body to govern mergers and acquisitions in India.

      The statutory law(s) which governs a particular industry, the Industrial Development and Regulation Act,  the Companies Act, the Competition Act, FEMA, Income tax Act, and SEBI (Substantial acquisition of shares and takeovers) Rules 2011 – knows as the ‘takeover code’, all together (but not limited to these) have rules and regulations which have to be followed for M & A in India.

    6. Question 6. What Is Conglomerate Merger?

      Answer :

      This is the kind of merger between two companies in totally unrelated businesses or industries. Like if an IT company wants to enter into FMCG segment by buying a company selling FMCGs. (Wipro anyone?! Well it’s actually the opposite of the now Wipro, because Wipro spinned off is non- it segments in 2013. Selling IT and baby nappies!)

    7. Question 7. What Is Congeneric Merger?

      Answer :

      Generic means in simple words – generally meaning the same – so congeneric 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 producer or professional bats for the game of cricket – and a company producing only baseball bats merge to go global with their bats!

    8. Question 8. What Is Reverse Merger?

      Answer :

      It is when a private company – buys a public company to automatically become a publicly traded 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.

    9. Question 9. Why Would An Acquisition Be Dilutive?

      Answer :

      An acquisition is dilutive if the additional amount of Net Income the seller contributes is not enough to offset the buyer’s foregone interest on cash, additional interest paid on debt, and the effects of issuing additional shares. Acquisition effects – such as amortization of intangibles – can also make an acquisition dilutive.

    10. Question 10. A Company With A Higher P/e Acquires One With A Lower P/e – Is This Accretive Or Dilutive?

      Answer :

      You can’t tell 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 getting more earnings 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.

    11. Question 11. Why Would A Strategic Acquirer Typically Be Willing To Pay More For A Company Than A Private Equity Firm Would?

      Answer :

      Because the strategic acquirer can realize revenue and cost synergies that the private equity firm cannot unless it combines the company with a complementary portfolio company. Those synergies boost the effective valuation for the target company.

    12. Question 12. Why Do Goodwill & Other Intangibles Get Created In An Acquisition?

      Answer :

      These represent the value over the “fair market value” of the seller that the buyer has paid. You calculate the number by subtracting the book value of a company from its equity purchase price. More specifically, Goodwill and Other Intangibles represent things like the value of customer relationships, brand names and intellectual property – valuable, but not true financial Assets that show up on the Balance Sheet.

    13. Question 13. What Is The Difference Between Goodwill And Other Intangible Assets?

      Answer :

      Goodwill typically stays the same over many years and is not amortized. It changes only if there’s goodwill impairment (or another acquisition). Other Intangible Assets, by contrast, are amortized over several years and affect the Income Statement by hitting the Pre-Tax Income line. There’s also a difference in terms of what they each represent, but bankers rarely go into that level of detail – accountants and valuation specialists worry about assigning each one to specific items.

    14. Question 14. Is There Anything Else “intangible” Besides Goodwill & Other Intangibles That Could Also Impact The Combined Company?

      Answer :

      Yes. You could also have a Purchased In-Process R&D Write-off and a Deferred Revenue Write-off.The first refers to any Research & Development projects that were purchased in the acquisition but which have not been completed yet. The logic is that unfinished R&D

      projects require significant resources to complete, and as such, the “expense” must be recognized as part of the acquisition. The second refers to cases where the seller has collected cash for a service but not yet recorded it as revenue, and the buyer must write-down the value of the Deferred Revenue to avoid “double-counting” revenue.

    15. Question 15. What Are Synergies, And Can You Provide A Few Examples?

      Answer :

      Synergies refer to cases where 2 + 2 = 5 (or 6, or 7…) in an acquisition. Basically, the buyer gets more value than out of an acquisition than what the financials would predict.

      There are 2 types: Revenue synergies and cost (or expense) synergies.

      • Revenue Synergies: The combined company can cross-sell products to new customers or up-sell new products to existing customers. It might also be able to expand into new geographies as a result of the deal.
      • Cost Synergies: The combined company can consolidate buildings and administrative staff and can lay off redundant employees. It might also be able to shut down redundant stores or locations.

    16. Question 16. How Are Synergies Used In Merger Models?

      Answer :

      Revenue Synergies: Normally you add these to the Revenue figure for the combined company 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 you reduce the combined COGS or Operating Expenses by this amount, which in turn boosts the combined Pre-Tax Income and thus Net Income, raising the EPS and making the deal more accretive.

    17. Question 17. What Is Vertical Merger?

      Answer :

      In chain of distribution – there is a producer – then the wholesaler/ agent – retailer – buyer. If a soap producing company purchases the company responsible for distributing its products – then it is vertical merger.Or a car manufacturing company purchases the company producing the tyres is uses on its cars.

    18. Question 18. What Is Horizontal Merger?

      Answer :

      Horizontal merger is when two companies which belong to the same industry merge – for example if Airtel and Reliance merge! They belong to the same industry = telecommunications.

    19. Question 19. What Is Target Valuation?

      Answer :

      Target valuation is the valuation of the ‘target’ company (the one that will be bought) by the acquiring company (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 first thing one sees in any M & A.

    20. Question 20. Can You Give Me Some Examples Of Why A Company Would Want To Taker Over Another Company?

      Answer :

      Examples of why merger/ purchase/ amalgamation would happen:

      1. to gain the benefit of synergy :the manufacturing company, struggling to cut costs on distribution  may purchase another company which has a very well established distribution channel to support its logistics requirement. Thereby, the best features of both the companies, manufacturing and distribution, together will bring best results to the resulting company.
      2. Mergers also happen to get benefit under the Income Tax Act, 1961: whereby, a company which is earning a lot of profit and incidentally has a huge tax liability may chose to buy a loss making company and take benefit of its loss to set off (and carry forward the loss too for further set-off) against its profits – thereby reducing its tax liability.
      3. Diversification is also one of the most important reasons for merger: suppose you are successful manufacturer of soaps which is a FMCG (Fast moving consumer goods) – and you would like to branch out and add more products under your brand name.You could start your own hair shampoo productions – construct a separate plant, buy new machines, develop new shampoo formula etc. etc. = a lot of cost + you also need to be better than the company selling shampoos in the market. Instead, you could buy the company selling shampoo and add it to your brand name! You’ll get the readymade and working infrastructure/ factory/ machines/ shampoo formula/ employees/ ready market too!
      4. sometimes mergers happen to build from strength to strength with very little delay : two moderately successful companies join to become one big fish in the pond. For example a pharmaceutical company buys the R & D division of another company to add to its R & D to develop new and improved medicinal drugs.
      5. Mergers and acquisition also happens to eliminate competition: if a new and upcoming mobile manufacturing company is making small waves in the market – cut it off before it starts making big waves on its own and usurping your market position – buy it out so that ‘it’ becomes ‘
      6. Merger or acquisition may also happen to enter another country in business terms : you are successfully running a telecom company in your country and you want to increase your footprint world wide – you buy small private telecom service providers in foreign lands!
      7. Then there is the simple reason : to increase market share.

    21. Question 21. Why Does Mergers Or Acquisitions Happen?

      Answer :

      The underlying rationale in every merger or acquisition or amalgamation or de-merger, is always more economic benefit.

      Economic benefits can be envisaged in various ways:

      it depends on every individual case to see what the benefit is that a certain merger/ de-merger is targeting at.

    22. Question 22. How Do You Determine The Purchase Price For The Target Company In An Acquisition?

      Answer :

      You use the same Valuation methodologies we already discussed. If the seller is a public company, you would pay more attention to the premium paid over the current share price to make sure it’s “sufficient” (generally in the 15-30% range) to win shareholder approval.For private sellers, more weight is placed on the traditional methodologies.

    23. Question 23. Let’s Say A Company Overpays For Another Company – What Typically Happens Afterwards And Can You Give Any Recent Examples?

      Answer :

      There would be an incredibly high amount of Goodwill & Other Intangibles created if the price is far above the fair market value of the company. Depending on how the acquisition goes, there might be a large goodwill impairment charge later on if the company decides it overpaid.

      A recent example is the eBay / Skype deal, in which eBay paid a huge premium and extremely high multiple for Skype. It created excess Goodwill & Other Intangibles, and eBay later ended up writing down much of the value and taking a large quarterly loss as a result.

    24. Question 24. A Buyer Pays $100 Million For The Seller In An All-stock Deal, But A Day Later The Market Decides It’s Only Worth $50 Million. What Happens?

      Answer :

      The buyer’s share price would fall by whatever per-share dollar amount corresponds to the $50 million loss in value. Note that it would not necessarily be cut in half. Depending on how the deal was structured, the seller would effectively only be receiving half of what it had originally negotiated. This illustrates one of the major risks of all-stock deals: sudden changes in share price could dramatically impact valuation.

    25. Question 25. Why Do Most Mergers And Acquisitions Fail?

      Answer :

      Like so many things, M&A is “easier said than done.” In practice it’s very difficult to acquire and integrate a different company, actually realize synergies and also turn the acquired company into a profitable division. Many deals are also done for the wrong reasons, such as CEO ego or pressure fromshareholders. Any deal done without both parties’ best interests in mind is likely to fail.

    26. Question 26. I Hope You Are Familiar With Beta. Will You Throw Some Light On How You Will Proceed To Calculate The Beta?

      Answer :

      Plot the index in one column and relevant stock price in other column. Say the data is plotted for one week basis. Then calculate % change in the two parameters and plot the data in the next two columns. Beta can be calculated by dividing %changes in index by % changes in the stock prices. You can then de-lever the beta to get another beta that can be re-levered in subsequent calculations.

    27. Question 27. How Would You Know If An Acquisition Is Dilutive?

      Answer :

      If your current shareholders’ earnings per share go down after the transaction, this would be dilutive. However, if your current shareholders’ earnings per share go up, then it would be accretive. It is best to look at the effects over a number of years; otherwise, this could be a bit short sighted.

    28. Question 28. What Discount Rates Will You Go About Using?

      Answer :

      • If you are doing a DCF, 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
      • If you are doing a DCF For 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.

    29. Question 29. If I Give You The Fcff, How Would You Go About Calculation The Fcfe?

      Answer :

      FCFF Tax on EBIT- Actual tax paid- Interest on cash (net of tax)- Interest on debt Repayment of debt = FCFE.

    30. Question 30. Can A Company Have Negative Enterprise Value?

      Answer :

      Yes, it surely can. If 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.

    31. Question 31. In Case Of An Acquisition, What Would You Consider – The Equity Value Or The Enterprise Value?

      Answer :

      While equity price reflects the market value and fundamental value of company, it is essential to consider the enterprise value in case of acquisition. This is because the enterprise value is an indicator of the company as a whole.

    32. Question 32. How Do You Value A Company?

      Answer :

      Although it depends on the industry and situation of the company, basic key lies in the discounting the future earnings to the present value. It can be DCFF, DCFE or DDM depending upon the industry of company.

    33. Question 33. How Do You Account For Transaction Costs, Financing Fees, And Miscellaneous Expenses In A Merger Model?

      Answer :

      In the “old days” you used to capitalize these expenses and then amortize them; with the new accounting rules, you’re supposed to expense transaction and miscellaneous fees upfront, but capitalize the financing fees and amortize them over the life of the debt. Expensed transaction fees come out of Retained Earnings when you adjust the Balance Sheet, while capitalized financing fees appear as a new Asset on the Balance Sheet and are amortized each year according to the tenor of the debt. 

    34. Question 34. How Would I Calculate “break-even Synergies” In An M&a Deal And What Does The Number Mean?

      Answer :

      To do this, you would set the EPS accretion / dilution to $0.00 and then back-solve in Excel to get the required synergies to make the deal neutral to EPS. It’s important because you want an idea of whether or not a deal “works” mathematically, and a high number for the break-even synergies tells you that you’re going to need a lot of cost savings or revenue synergies to make it work.

    35. Question 35. How Would An Accretion / Dilution Model Be Different For A Private Seller?

      Answer :

      The mechanics are the same, but the transaction structure is more likely to be an asset purchase or 338(h)(10) election; private sellers also don’t have Earnings Per Share so you would only project down to Net Income on the seller’s Income Statement. Note that accretion / dilution makes no sense if you have a private buyer because private companies do not have Earnings Per Share.

    36. Question 36. What’s An Earn Out And Why Would A Buyer Offer It To A Seller In An M&a Deal?

      Answer :

      An Earn out is a form of “deferred payment” in an M&A deal: it’s most common with private companies and start-ups, and is highly unusual with public sellers. It is usually contingent on financial performance or other goals

      for example: the buyer might say, “We’ll give you an additional $10 million in 3 years if you can hit $100 million in revenue by then.” Buyers use it to incentivize sellers to continue to perform well and to discourage management teams from taking the money and running off to an island in the South Pacific once the deal is done.

    37. Question 37. Walk Me Through The Most Important Terms Of A Purchase Agreement In An M&a Deal?

      Answer :

      There are dozens, but here are the most important ones:

      1. Purchase Price: Stated as a per-share amount for public companies.
      2. Form of Consideration: Cash, Stock, Debt…
      3. Transaction Structure: Stock, Asset, or 338(h)(10)
      4. Treatment of Options: Assumed by the buyer? Cashed out? Ignored?
      5. Employee Retention: Do employees have to sign non-solicit or non-compete agreements? What about management?
      6. Reps & Warranties: What must the buyer and seller claim is true about their respective businesses?
      7. No-Shop / Go-Shop: Can the seller “shop” this offer around and try to get a better deal or must it stay exclusive to this buyer?

    38. Question 38. Why Do Deferred Tax Liabilities (dtls) And Deferred Tax Assets (dtas) Get Created In M&a Deals?

      Answer :

      These get created when you write up assets – both tangible and intangible – and when you write down assets in a transaction. An asset write-up creates a deferred tax liability, and an asset write-down creates a deferred tax asset. You write down and write up assets because their book value – what’s on the balance sheet – often differs substantially from their “fair market value.” An asset write-up creates a deferred tax liability because you’ll have a higher depreciation expense on the new asset, which means you save on taxes in the short-term – but eventually you’ll have to pay them back, hence the liability. The opposite applies for an asset write-down and a deferred tax asset.

    39. Question 39. Could You Get Dtls And Dtas In An Asset Purchase?

      Answer :

      No, 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, but the tax values are not.

    40. Question 40. How Do You Account For Dtls In Forward Projections In A Merger Model?

      Answer :

      You create a book vs. cash tax schedule and figure out what the company owes in taxes based on the Pretax Income on its books, and then you determine what it actually pays in cash taxes based on its NOLs and newly created amortization and depreciation expenses (from any asset write-ups). Anytime the “cash” tax expense exceeds the “book” tax expense you record this as an decrease to the Deferred Tax Liability on the Balance Sheet; if the “book” expense is higher, then you record that as an increase to the DTL.

    41. Question 41. Explain Why We Would Write Down The Seller’s Existing Deferred Tax Asset In An M&a Deal?

      Answer :

      You write it down to reflect the fact that Deferred Tax Assets include NOLs, and that you might use these NOLs post-transaction to offset the combined entity’s taxable income. In an asset or 338(h)(10) purchase you assume that the entire NOL balance goes to $0 in the transaction, and then you write down the existing Deferred Tax Asset by this NOL write-down.

      In a stock purchase the formula is:

      DTA Write-Down = Buyer Tax Rate * MAX(0, NOL Balance – Allowed Annual NOL Usage * Expiration Period in Years)

      This formula is saying, “If we’re going to use up all these NOLs post transaction, let’s not write anything down. Otherwise, let’s write down the portion that we cannot actually use post-transaction, i.e. whatever our existing NOL balance is minus the amount we can use per year times the number of years.” 

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