Merger Model Interview Questions & Correct Answers/ Graded A+

Why would a company want to acquire another company? : A company would acquire another company if it believes it will earn a good return on its investment - either in the form of a literal ROI< or in terms of higher EPS number appealing to its shareholders - Buyer wants to gain market share by buying a competitor - Buyer needs to grow more quickly and sees and acquisition as a way to do that - Buyer believes the seller is undervalued - Buyer wants to acquire the seller's customers so it can up-sell and cross-sell products and services to them - The buyer thinks the seller has a critical technology, intellectual property, or other secret sauce it can use to enhance its business - The buyer believes it can achieve significant synergies and make it an accretive deal Walk me through a basic merger model : A merger model is used to analyze the financial profiles of 2 companies, the purchase price and how the purchase is made, and it determines whether the buyer's EPS increases or decreases afterward 2 Step 1 is making assumptions about the acquisition - the price and whether it was done using cash, stock, debt or some combination of those. Next, you determine the valuations and shares outstanding of the buyer and seller and project the income statements 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 on Debt in the Combined Pre-Tax Income line; you apply the buyer's Tax Rate to get the Combined Net Income and then divide by the new share count to determine the combined EPS. You could also add in the part about Goodwill and combining Balance sheets What's the difference between a merger and an acquisition. : There's always a buyer and a seller in any M&A deal - the difference is that in a merger the companies are often similarly sized whereas in an acquisition the buyer is significantly larger (often by a factor of 2-3x or more