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M&a Interview Questions

1. An equity-swap deal between Company A with a PE of 10 and Company B with a PE of 8 would be accretive for Company A. Company A issues more shares but now has higher total earnings at a lower combined PE ratio of 8.8/8.9. 2. If Company A uses debt at an after-tax cost of 5% to acquire Company B, the deal would still be accretive for Company A, though less so than an equity deal. For the deal to break even, the after-tax cost of debt would need to be 12.5%, which is the reciprocal of Company B's PE ratio. 3. For a deal where the companies are the

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M&a Interview Questions

1. An equity-swap deal between Company A with a PE of 10 and Company B with a PE of 8 would be accretive for Company A. Company A issues more shares but now has higher total earnings at a lower combined PE ratio of 8.8/8.9. 2. If Company A uses debt at an after-tax cost of 5% to acquire Company B, the deal would still be accretive for Company A, though less so than an equity deal. For the deal to break even, the after-tax cost of debt would need to be 12.5%, which is the reciprocal of Company B's PE ratio. 3. For a deal where the companies are the

Uploaded by

Jack Jacinto
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© © All Rights Reserved
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Download as DOCX, PDF, TXT or read online on Scribd
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M&A Interview Questions

1. Company A has PE of 10 and company B has PE of 8.


In an equity-swap deal, is the transaction Accretive or dilutive?
Accretive for A. Say A is 8 shares of $10 (earnings $8), B is 10 shares of $8 (earnings $10). A issues 8 more
shares, now has 16 shares of $10 with earnings of $18. P/E has gone from $10 to 8.8/8.9
2. This is to break the people who read the Vault guide and quote the "cheaper earnings" answer / shortcut
Company A uses debt which has an after tax kd of 5% to acquire B.
A. Is the deal still (Accretive / dilutive) like in Level 1 question? More or less?
B. What after tax kd would make the deal approximately break even from an accretion perspective?
Accretive for A. You're borrowing $80 at 5%, or a cost of $4 to add earnings of $10. It would break even at
12.5% (1/(P/E of B)).
3. This question requires a framework. If you blurt out a number: A. I bet I know what answer you're going to
blurt out and it's wrong and B. you need to show me you put more thought into it regardless: Right number with
no backup is the wrong number.
Assume the companies are the same size (read: same EV) and other reasonable simplifying assumptions.
A. Without doing any math, what are some reasonable boundaries for the PE ratio of the PF entity?
B. How Accretive is the deal in Level 1 as a %? Is your PF PE ratio within the bounds you expected?
It should be less than 9; you can't just average the P/Es, think about it as averaging the earnings and what that
would mean if the market cap was the same (market cap of $80 and earnings of $9 = P/E of less (This is only a
guess after having done the math; but I think there's some truth in not being able to add/average P/Es, even of
same-size companies).
4. If you have the framework for Level 3, chances are you can probably get this one too
Assume company A is twice the size of company B (read: EV A = EV B x 2).
A. Without doing any math is the deal more Accretive or less Accretive? What are the PE bounds in this case?
B. Now do the math and tell me exactly how Accretive it is. Does your answer make sense?
It will be less Accretive because the company that's making it Accretive has a lower weight.
Say A has earnings of $16 and is $16 shares of 10; they have to issue 8 more shares to make the purchase
and now have a market cap of $240 and earnings of $26; $234 would be P/E of 9 but it's higher, so ~9.25

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