Mock Interviews Flashcards
Walk me through the process of a typical sell-side M&A deal.
- Meet with company, create initial marketing materials like the Executive Summary and Offering Memorandum (OM), and decide on potential buyers. 2. Send out Executive Summary to potential buyers to gauge interest. 3. Send NDAs (Non-Disclosure Agreements) to interested buyers along with more detailed information like the Offering Memorandum, and respond to any followup due diligence requests from the buyers. 4. Set a “bid deadline” and solicit written Indications of Interest (IOIs) from buyers. 5. Select which buyers advance to the next round. 6. Continue responding to information requests and setting up due diligence meetings between the company and potential buyers. 7. Set another bid deadline and pick the “winner.” 8. Negotiate terms of the Purchase Agreement with the winner and announce the deal.
What makes a company not ideal for an LBO?
Volatile industry, volatile earnings, undisciplined management, no viable exit opportunities
Why is WACC considered an opportunity cost?
WACC is the blended rate of return that investors could get on the company’s debt and equity. Thus, it represents an opportunity cost (hurdle rate of return) that an investor would want to achieve since it could just invest in the company’s debt/equity.
What’s the difference between a consumer and retail company?
Consumer company is going to be the Unilevers and P&Gs of the world. They manufacture the products and sell to the retail stores, such as Target, Walmart, etc.
Assume you have two DCF models with the same underlying PP&E. You depreciate PP&E in one DCF using the straight-line method over 10 years. You depreciate PP&E straight-line over 5 years for the other. What is the difference in total free cash flows between the two models?
It depends on the timeframe considered. If it is into perpetuity, then the net effect is 0. If its for a shorter timeframe, then there will be a difference.
What are the steps in the LBO process?
- Sourcing the deal 2. Screening prospects/Due Diligence a. Analyzing financials i. Industry ii. Competitive landscape iii. FCFs iv. Debt v. Margins 3. Determine financing 4. Road show for leveraged loans/bonds 5. Syndicate debt 6. Acquisition
Part 1: Company A with a P/E of 25x acquires a company with a P/E of 15x. Is the deal accretive or dilutive? Part 2: Company A has 10 shares @ $25/share. NI of $10. Company B has $150 in equity value and $10 in NI. 20% tax rate. If an all stock deal, is the deal accretive or dilutive, and by how much? Part 3: Say deal is financed with all debt at interest rate of 10%. Is the deal accretive or dilutive? 20% tax rate.
Part 1: Ask if all debt (cash) or all stock? If all stock, then accretive because a company with a 4% yield (1/25) is acquiring a company that yields ~7% Part 2: Need to issue 6 shares to purchase equity with $25/share and $150 in equity value. Combined NI is $20 ($10 + $10). Existing shares of 10 plus 6 new shares= 16. EPS= 20/16 = 1.25 vs 1 is 25% accretive. Part 3: Dilutive. You’re taking on debt that costs 8% (10% x (1-20%)) and only yielding ~7%.
Explain the differences between EV/EBITDA and P/E ratio.
EV takes into account cap structure, while P/E does not. EPS considers depreciation, interest, taxes
3 different methodologies and ranking on football field.
Avoid extremes. Say, “generally” precedent transactions is at higher end while LBO analysis at lower end
- Tax rates are expected to go down with the new administration. How will this affect valuation?
FCF increases due to lower tax amount, less cash taxes paid. WACC increases due to lessened impact of interest expense deduction. Overall, valuations increase. More cash on hand to invest in high growth projects, buyback shares, etc.
What is contained in a pitchbook? Why you should hire us to sell your company.
Highest valuations based on previous transactions Current value of company Timeline of M&A (CIM, etc)
20X PE 25% tax 2000 revenue 50% GM 7.5x EV/EBITDA 1000 debt 10% interest rate 500 SGA/DA 100 shares outstanding What is equity value?
6,000
Cash flow statement: Current Liabilities are ____ of cash Current assets are ____ of cash
CL are sources of cash CA are uses of cash
- Two companies with exactly the same financial profile, same industry, etc. BUT one is in Canada and the other is in Brazil. Which has higher valuation?
Canada. Brazil would have a higher cost of debt due to the riskiness, hence a higher WACC and lower valuation.
What are the characteristics of a comps set?
Operational characteristics Credit profile Performance Size Geography
Tell me about a company you are following.
Know a company and its peers. Know multiples
You’re sitting next to a CEO on a plane. He talks about selling his company. What questions do you ask him?
- Why sell it? - Want to remain involved? - Curious about your history with company, why did you start, etc? - Talk about previous transactions with companies in that industry - Any idea of your EBITDA? - Sense of timeline - How valuations are derived
What are the two adjustments to alter a DCF valuation without altering the financial projections?
Choose a shorter maturity risk free rate and then derive a different comparables set that would lower the beta Mid year convention
Company A: PE 20x Interest rate 10% Cash interest 5% Tax 20% Company B: PE 10x Company A acquires Company B utilizing 50% stock, 25% debt, and 25% cash on hand. What is the cost of the acquisition? Is the acquisition accretive or dilutive? Why?
Company A: 5% yield (1/20) Company B: 10% yield (1/10) Cost of interest: 10% x (1-20%)= 8% Cost of cash: 5% Stock: 50% x 5% = 2.5% Debt: 25% x 8% = 2% Cash: 25% x 5% = 1.25% Cost of acquisition= 2.5% + 2% + 1.25% = 5.75% Accretive because company A is paying 5.75% to acquire company B, which yields 10%.
