While discounted cash flow analysis is the best method available for assessing the intrinsic value of a business, it has several limitations. One issue is that the terminal value represents a disproportionately large amount of the value of the total business, and the assumptions used to calculate the terminal value (perpetual growth or exit multiple) are very sensitive. Another issue is that the discount rate used to calculate net present value is very sensitive to changes in assumptions about the beta, risk premium, etc. Finally, the entire forecast for the business is based on operating assumptions that are nearly impossible to precisely pin down.
From a valuation perspective, the most important factors in an M&A model are synergies, the form of consideration (cash vs shares), and purchase price. Synergies enable the acquiring company to realize value by enhancing revenue or reducing operating costs, and this is typically the biggest driver of value in an M&A deal (note: synergy values are very hard to estimate and can often be overly optimistic).
The mix of cash vs share consideration can have a major impact on accretion/dilution of per share metrics (such as EPS). To make a deal more accretive, the acquirer can add more cash to the mix and issue fewer shares. Finally, the purchase price and takeover premium are major factors in the value that’s created.
The quickest way to tell if a deal between two public companies would be accretive is to compare their P/E multiples. The company with a higher P/E multiple can acquire lesser valued companies on an accretive basis (assuming the takeover premium is not too high). Another important factor is the form of consideration and mix of cash vs share.
LBO models are most sensitive to the total leverage the business can service (typically based on the debt/EBITDA ratio), the cost of debt, and the acquisition or exit multiple assumptions. In addition, operating assumptions for the business play a major role as well.
This is one of the most common private equity interview questions. Deciding between company A and B requires a comprehensive analysis of both quantitative and qualitative factors. Assuming they are in the same industry, you could start to compare the businesses based on:
All of the above criteria need be assessed in three ways: how they are in (1) the past, (2) the near-term future and (3) the long-term future. This will be the basis of a DCF model (which will have multiple operating scenarios), and the risk-adjusted NPV for each business can be compared against the price the business might be purchased at.
This is one of those private equity interview questions that you really have to prepare for. Giving generic answers like “your firm has a great reputation” is not sufficient – you need to point out some real specifics. Spend time going through the company’s website and looking at their current and past portfolio companies.
Make sure you find several that you’re personally interested in and can speak about in detail (see the next question below). Have a solid understanding of the firm’s approach to investing, their track record, who the founders and management team are, and most important, what you like about their approach.
Research in advance on the firm’s website and write down notes on the portfolio companies you find the most interesting.
Know about their:
You’ll have to do a lot of research. You can probably find an official statement on their website, but a more insightful answer would come from having read any interviews with founders and partners that talk about their approach, as well as understanding the themes across their portfolio companies and how they all fit together.
This is a trick in Private equity interview. Because through this question, the interviewer is trying to understand whether you have a real interest for private equity or your ultimate goal is to exit private equity and join something else.
Private equity firms want three things:–
As a private equity employee, your job would be the same.
These are the keys that a PE investor would look at before thinking of an LBO. Other than these, he would also look at changing habits of the customer, enhanced automation, application of disruptive technologies etc.
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