M&A Transaction Discussion Flashcards
Walk me through one of the deals listed on your resume
- Try to pick an M&A deal rather than an equity/debt financing and aim for more “unique” deal types like divestitures or distressed M&A; also try to pick something that’s either “high-profile” or a deal where you contributed a lot.
- Don’t go into too much detail for an “opening question” like this - just give a brief overview and then let them ask the questions.
- Describe the company, give approximate financial figures (revenue, EBITDA, market cap) and say what they wanted to do.
Example of how you might describe a sell-side M&A deal
One of these deals I worked on was the sale of a $1B market cap consumer retail company. They specialized in food and beverages and sold to the US and European markets. Their revenue was around $800M with $200M EBITDA, growing around 5% per year. They were interested in selling because of a string of recent acquisitions in their market and felt they could get a premium valuation. They engaged us to run a broad sell-side process with financial and strategic buyers.
Example of how you might describe an IPO
One deal I worked on was the $200M IPO of a Chinese Internet company on the Hong Kong stock exchange.
They had revenue of around $50M, EBITDA of $10M and were growing very quickly at 50% per year.
They were going public to raise funds so they could expand beyond China and get into other markets and we were the lead underwriter on the deal.
Did you do anything quantitative for this deal? It looks like it just involved research.
This is a common scenario for summer interns or if you worked at a small boutique where financial modeling was not as common.
- Don’t say you did nothing quantitative but don’t say you know everything either. If you didn’t build the model yourself, just point out how you contributed to it.
Here is how you might respond:
- A lot of what I worked on involved identifying potential buyers to see what the best fit might be.
- Our team did some valuation and financial modeling work as well.
- I supported by finding the relevant figures that go in the models, figuring out how they worked and confirming the information was correct.
Why did the company you were representing want to sell?
Maybe the founder wanted to exit the business or maybe the PE firm that owned the company wanted to exit its investment.
- Or maybe there was a string of recent acquisitions in the market.
Here is an example:
- They wanted to sell because larger companies in the market had recently acquired their closest competitors and they felt that they could no longer thrive as a standalone entity.
- Additionally, they had received informal offers from a few larger companies before, and felt that the timing was right to explore a sale once again.
Why did the company you were representing want to buy another company?
For this one you need to talk about what specific type of other company they wanted to buy.
- Did they want to expand in new markets or geographies? Get into a new industry? Pursue a “hot” start-up that was receiving a lot of attention?
Here’s an example:
- Our client was interested in expanding from midstream oil & gas production and wanted to get into the upstream market as well, especially in North America.
- They had tried to do so before, but lacked the expertise and industry contacts - so they wanted to acquire a sizable company that head already done it so they could grow their top-line and also diversify their business.
Describe the deal process.
This one is completely dependent on what type of deal you worked on - but no matter what you say, don’t go into an extreme level of detail. Focus on:
- Whether it was a broad or targeted process for M&A deals
- What kinds of buyers/sellers you approached; for debt and equity financing just go through the key points in the registration statements or investor memos
- What the investor reaction was.
Example:
We ran a broad sell-side auction process for our client. They had in mind around 10-20 strategic buyers that might have been interested, and we added around 30 financial sponsors to their list. We got serious interest from about 5 of the companies we approached, which led to 1 strategic buyer and 1 financial sponsor ultimately competing to win the deal.
What were the major selling points of your client?
This one applies to both sell-side deals and equity/debt financings - good points to raise might include:
- Financial performance
- Industry trends
- Any competitive advantages it enjoyed
- Anything positive about its customer base.
Stay away from talking about strength of management team as it’s difficult to explain in interview.
Example:
The Swedish healthcare company we were representing had been growing at around 15% year-over-year, vs 5% average growth for the industry as a whole. It also had higher margins than other companies in the industry because it focused on higher-end and more profitable medical care. The market as a whole was also very favorable because the Swedish population was aging and demand for healthcare could only rise in years to come.
What about its weaknesses? Why might investors be hesitant?
You could talk about:
- Unfavorable market trends
- Increased competition
- Uncertain financial projections
- The threat of new regulation harming the company
Example:
Although our client had performed well in the European healthcare market, its financial projections depended on expanding into the US and Asia, and it had no track record there. Also, massive healthcare reform in the US might make it significantly more difficult to enter the market in the future.
What were the major obstacles to getting the deal done? What happened?
These could be:
- Disagreements to legal issues
- Problems with retaining the management team
- If you can point to any obstacles that you played a role in resolving, bring them up here
Example:
We ran into issues because the private equity firm we were in discussions with wanted to make the deal contingent on the debt financing, which the CEO could not go along with. We also ran into problems with valuation, because the PE firm discounted our projections by about 20%. Eventually we compromised on both points, and on the second issue I helped create a more detailed revenue model for the company that validated some of our assumptions, so the PE firm agreed to meet us halfway.
What kind of standalone operating model did you create for your client?
For this one, you don’t need to explain how to link the 3 statements - focus on:
- How you created the revenue and expense model
- Usually you do this by looking at revenue in terms of units sold, factories, or production and you analyze expenses by fixed costs and employees.
Example:
On the revenue side, we looked at our client’s existing, proven oil reserves and used their historical exploration & production figures to project how much they would be adding each year vs. what would be depleted. Then we combined that with projections for oil prices to estimate their yearly revenue. On the expense side, the majority of costs were tied to how many oil fields were operational, so we linked numbers for transportation, technology, and drilling costs to those.
What did you look at in the due diligence process?
The most important items here are:
- The company’s financial statements
- Contracts (with customers, employees and suppliers)
- Then tax, legal, environmental, IP, and regulatory issues.
Note that as an investment banker you don’t really “look at” much in the due diligence process for any deal - you just process requests. For IPOs, this changes and you’re responsible for conducting customer due diligence calls - so you need need to talk about that and what customers told you directly.
Example:
We looked at all the standard items, including the company’s audit reports and financial statements and then brought in specialists to look at the contracts, legal, and intellectual property issues. I came up with lists of questions for the customer due diligence calls we conducted, which was important because investors at the time were reluctant to invest in IPOs in emerging markets like Brazil - and by speaking with customers we were able to assess the risk for ourselves.
Tell me about the market your client was in.
Focus on the major trends and how the company you represented compared to the competition. Don’t go into every detail just pick the 1-2 major points and focus on how it affected the deal and/or valuation.
Example:
Our client was in the mainframe software market, which had existed for over 20 years and had consolidated significantly in recent years, with IBM acquiring many of the smaller independent vendors. It was a slow-growing market and most of the sales came from existing customers upgrading - as a result, we couldn’t find many interested strategic buyers, most of the interest came from financial sponsors that were attracted to our company’s high margins and recurring revenue.
How did you narrow down potential targets (or potential investors)?
For potential targets, focus on:
- Financial
- Industry
- Geographical criteria
For potential investors, focus on:
- What they’ve invested in before
- How much synergy or “fit” there is
- Whether or not they have complementary portfolio companies (PE firms)
Example:
We picked potential investors mostly based on size and acquisition activity in our market in the past. There were a lot of healthcare acquisitions recently, but we wanted to focus on firms that were active in the North American market specifically, and ones that had acquired firms worth over $500 million. We looked at some financial sponsors as well, but focused on ones that had sizable healthcare companies in their portfolio.
How did you value your client?
Just take the standard methodologies and how you applied them to the company you worked with. Note that for IPOs, you only care about public company comparables - for other types of deals you look at a wider range of methodologies.
Example:
We used public company comparables, precedent transactions, and a DCF. For public comps, we picked a set of software companies with over $1 billion revenue, for precedent transactions, we looked at software deals worth over $500 million, and we used the standard DCF but looked at a few different scenarios because our client’s projections were aggressive. We didn’t look at other methodologies because this was a standard M&A deal and they were almost certainly going to sell to a strategic buyer.
