Merger model interview questions: 17 real questions

001In one or two sentences, what is a merger model, and what question is it built to answer?

core

• Why do bankers care about EPS accretion specifically, rather than just whether the deal is a good use of capital?

002Walk me through a basic merger model.

intermediate

• Which single assumption usually moves pro-forma EPS most?

003What are the complete effects of an acquisition on the buyer's statements?

intermediate

• Which of those effects are non-cash?

004Fixed vs floating exchange ratio in a stock deal, what's the difference and who bears the risk?

intermediate

• What's a collar?

005An acquirer has 20 million shares trading at $30 each and $30M of net income. It buys a target for $240M of equity value in an all-stock deal; the target earns $16M of net income. No synergies. Walk me through whether the deal is accretive or dilutive to EPS, and by how much.

intermediate

• Without redoing the math, would accretion be higher or lower if the acquirer funded the deal entirely with cash earning almost nothing?
• What is the combined company's P/E, and why does it land where it does relative to 20x and 15x?
• If the target demanded a price implying a 22x purchase P/E instead, what happens to accretion and why?

006In an all-stock merger, without doing any arithmetic, where should the combined company's P/E multiple land relative to the two standalone multiples, and what determines exactly where in that range it falls?

intermediate

• Does the same 'between the two multiples' logic hold for combined EV/EBITDA? Why or why not?
• If a deal is 25% accretive for a given acquirer, roughly what happens to that percentage if the acquirer's equity value and net income both double?

007AlphaFoods has net income of $150M, 75M shares outstanding, and a $40 share price. It acquires BetaSnacks, which has net income of $120M, 60M shares, and a $20 share price, in an all-stock deal at no premium. Ignoring synergies and deal costs, is the deal accretive or dilutive to AlphaFoods' EPS, and by roughly how much?

intermediate

• What is the most common share-count mistake candidates make in this calculation?
• Redo the math with a 25% premium. Is the deal still accretive?
• Why does buying a lower-P/E target with higher-P/E stock create accretion, intuitively?

008A buyer trading at 12.5x earnings acquires a target at an effective 16x earnings price. The consideration is 25% balance-sheet cash yielding 4% pre-tax, 25% new debt at 6%, and 50% newly issued stock; the tax rate is 25%. Without building a model, is the deal accretive or dilutive?

intermediate

• What real-world factors does this shortcut ignore that a full merger model would capture?
• Rework the conclusion if the deal were 100% stock. Accretive or dilutive, and why?
• Why is the cost of stock the buyer's earnings yield rather than its dividend yield or cost of equity?

009Stock is usually described as the most expensive way to pay for an acquisition. Under what circumstances does it actually become the cheapest, and why might a buyer choose stock even when it is not?

intermediate

• How does a buyer decide how much of its balance-sheet cash it can actually deploy in a deal?
• What credit metrics constrain how much debt can fund the deal?
• Why would a seller's shareholders accept stock instead of cash?

010Buyer pays $500M for a target with $300M book equity, writes up PP&E by $50M, 25% tax rate, stock purchase. How much goodwill is created?

advanced

• Why does the write-up CREATE a deferred tax liability?

011Why do asset write-ups in M&A create deferred tax liabilities?

advanced

• In what deal structure does the tax basis step up too, eliminating the DTL?

012Acquirer can fund a deal with cash earning 5% pre-tax, new debt at 5%, or stock at a 20x P/E. 25% tax rate. Rank the funding costs.

advanced

• At what acquirer P/E does stock become the cheapest source in this setup? (Above 1/0.0375 ≈ 26.7x)

013A deal is $6M dilutive to pro-forma net income. Tax rate 25%. What pre-tax synergies make it breakeven?

advanced

• Why do markets discount revenue synergies more than cost synergies?

014What is contribution analysis and when does it matter?

advanced

• Why is it nearly meaningless in an all-cash deal?

015Asset purchase vs stock purchase, key differences and who prefers which?

advanced

• Why do sellers of C-corps particularly resist asset deals?

016Can an accretive deal destroy value? A dilutive one create it?

advanced

• So what number would you actually check to judge value creation? (NPV of synergies vs control premium paid)

017Why does the combined company's P/E multiple depend on how an acquisition is financed, while the combined EV/EBITDA multiple is essentially insensitive to the financing mix?

advanced

• Which financing method typically produces the most accretive outcome in a low-rate environment, and why?
• If you only had the combined EV/EBITDA multiple, could you back into the combined P/E? What extra information would you need?