M&A

You prepare first: diligence on your own client, the model, the teaser and the CIM, and a buyer list. Then you go out, send teasers, sign NDAs and release the CIM. First round bids come in as non-binding indications. You take a shortlist into management presentations and the data room, then take binding second round bids with markups of the purchase agreement. Then negotiate, sign, and close once approvals clear.

• Preparation: diligence, model, teaser, CIM, buyer list
• Outreach on the teaser, NDA signed before the CIM goes out
• First round: non-binding indications of interest, used to shortlist
• Second round: management presentations, data room, markup of the agreement
• Binding bids, negotiation, signing, then closing once approvals clear

Whether you know signing and closing are separate events. Candidates who end the process at signing have not seen a deal through.

The teaser is one or two anonymous pages sent cold to a wide buyer list, describing the business generically enough that nobody can identify it: sector, scale, a few financial highlights, the investment case. The CIM is the full book, fifty pages or more, naming the company and giving detailed financials, customers, management and projections. It only goes out after an NDA is signed, because it contains genuinely confidential information.

• Teaser: short, anonymous, sent broadly to generate interest
• CIM: detailed, named, sent only after an NDA
• CIM covers business description, financials, customers, management, projections
• The NDA is the gate between the two documents
• Both are marketing documents, so projections in a CIM are usually optimistic

Whether you flag that a CIM is a marketing document. Treating management projections in a CIM as neutral truth is a classic junior error.

Proration. The acquirer fixes the aggregate mix, say fifty percent cash and fifty percent stock in total, and lets each holder state a preference. If elections exceed the pool, everyone electing that form is scaled back pro rata and receives the balance in the other. So the mix the acquirer wants is guaranteed regardless of what shareholders ask for, and elections only determine who gets what.

• Aggregate mix is fixed by the acquirer, not by shareholder demand
• Elections are scaled back pro rata if oversubscribed
• Holders receive the balance in the other form of consideration
• Protects the acquirer's funding plan and its pro forma balance sheet
• Elections sort holders by preference, mainly tax driven, without changing the total

Whether you know the acquirer controls the total mix. Candidates often assume the consideration mix floats with shareholder choice.

Usually to get something it cannot build fast enough on its own: market share, a product, technology, distribution, or a team. Financially the deal has to create value through cost or revenue synergies, or by being accretive to earnings. There are also defensive reasons, like consolidating a fragmented market before a competitor does it first.

• Strategic: market share, products, geography, technology, talent
• Financial: synergies, accretion, sometimes diversification
• Defensive: consolidation, blocking a competitor
• Cost synergies are more credible than revenue synergies
• The real test is whether value created exceeds the premium paid

Whether you think commercially rather than reciting a list.

Technically a merger combines two companies into a new single entity, often between roughly equal parties, while an acquisition is one company buying another which continues as a subsidiary or is absorbed. In practice the terms are used loosely and almost every deal has an acquirer, so the distinction is often more about how the deal is presented publicly than about the legal structure.

• Merger: two entities combine, often framed as equals
• Acquisition: one buys the other, which is absorbed or held as a subsidiary
• In practice nearly every deal has a clear acquirer
• The framing is often presentational rather than structural
• Accounting treats almost all of them as acquisitions regardless of label

Whether you note the distinction is largely presentational. Answering it as a rigid legal difference misses the real-world point.

All three separate a business from a parent, but the consideration differs. In a spin-off the parent distributes subsidiary shares to its own shareholders pro rata, receives no cash, and can usually structure it tax-free. In a carve-out the parent sells a minority stake to the public through an IPO, raises cash and keeps control. A divestiture is an outright sale to a buyer for cash, which is taxable.

• Spin-off: shares distributed to existing holders, no cash to the parent
• Spin-offs can usually be structured tax-free if the rules are met
• Carve-out: minority IPO of a subsidiary, parent gets cash and keeps control
• Divestiture: outright sale for cash, generally taxable
• The choice turns on cash need, tax treatment and whether a buyer exists

Whether you use cash and tax as the sorting criteria rather than reciting three definitions.

An earnout is part of the purchase price paid only if the business hits agreed targets after closing, usually EBITDA, revenue or a milestone like a regulatory approval. It bridges a valuation gap: the seller believes the forecast, the buyer does not, so you let the outcome decide. Most common in founder-led and private deals, and a frequent source of post-closing disputes.

• Contingent consideration paid only if post-closing targets are met
• Bridges a gap between buyer and seller views of the forecast
• Metrics are usually EBITDA, revenue or a specific milestone
• Common in founder-led, private and biotech deals
• Disputes are frequent because the buyer now runs the business

Whether you spot the built-in conflict: the buyer controls the company whose performance decides the seller's payment.

Because it is the first question a public acquirer's board and its shareholders ask, and a dilutive deal is hard to sell publicly even when it makes strategic sense. It is also a fast sanity check on price and funding mix that you can run in a minute on a napkin. What it is not is a valuation test, so it tells you about the likely market reaction rather than whether the deal creates value.

• Boards and shareholders anchor on near-term EPS impact
• It is a quick screen on price and financing mix
• Usually run for the first two or three years after closing
• It is an accounting outcome, not a measure of value creation
• Management guidance often commits to accretion by a specific year

Whether you can hold both ideas: it matters commercially and it is analytically weak. Dismissing it entirely reads as naive about how boards behave.

Rank them by after tax cost against what the target earns. Cash is usually cheapest: giving up 3% of interest income costs 2.25% after tax at a 25% rate. New debt at 6% costs 4.5% after tax, since interest is deductible. Stock costs the acquirer's earnings yield, one over its P/E, so about 6.7% at 15 times. Cash, then debt, then stock.

• Cost of cash: forgone interest, after tax, so 3% becomes 2.25%
• Cost of debt: interest rate after tax, so 6% becomes 4.5%
• Cost of stock: the acquirer's earnings yield, one divided by its P/E
• Accretive if the target's earnings yield exceeds the after-tax cost of funding
• Order is cash, then debt, then stock, at normal rate levels

Whether you express all three as an after-tax yield so they are comparable. Candidates usually know cash is cheapest but cannot say why in the same units.

You compare what each side brings to the combination, revenue, EBITDA, net income, cash flow, against the ownership each side would hold afterwards. If a company contributes 60% of combined EBITDA but would own only 52% of the pro forma equity, the gap is the question. It matters most in mergers of equals and low or no premium stock deals, where there is no cash price to argue about.

• Compares contribution of each financial metric to pro forma ownership
• Typically run on revenue, EBITDA, EBIT, net income and free cash flow
• A gap between contribution and ownership is the negotiating point
• Most useful in mergers of equals and no-premium stock deals
• Ownership follows relative market values, contribution follows fundamentals

Whether you can explain why contribution and ownership differ: ownership is set by market value, contribution by earnings, and the gap is the relative multiple.

When it is worth more inside somebody else's portfolio than standing alone. That happens when it lacks the scale to compete on cost, when it needs capital or capability it cannot fund, when the founder or family wants liquidity, or when the sector is consolidating and waiting means selling later from a weaker position. The hardest version is a good business that is simply subscale, because there is no crisis forcing the decision.

• Sell when the business is worth more to an owner than standalone
• Triggers: subscale cost position, capital needs, succession, sector consolidation
• Consolidating sectors reward early movers, latecomers sell from weakness
• A strong current multiple is an argument for selling, not against
• Management incentives often push against selling, which is a governance issue

Whether you acknowledge the conflict: management usually prefers to buy rather than be bought, because being bought ends their jobs.

At close the buyer must record the target's assets and liabilities at fair value rather than book value. You write assets up to fair value, recognize intangibles that were never on the target's books such as brands and customer relationships, and record deferred taxes on the differences. Goodwill is the plug: whatever purchase price is left over after allocating to identifiable net assets. It represents what you paid beyond the identifiable pieces.

• Assets and liabilities restated to fair value at close
• Previously unrecorded intangibles get recognized
• Deferred tax liability arises where book is written up but tax basis is not
• Goodwill is the residual plug, not a valuation of anything specific
• Goodwill is tested for impairment annually rather than amortized

Whether you describe goodwill as a residual. Candidates often describe it as if it were an asset that was independently valued.

Uses first: $800m for the equity, $200m to refinance the target's existing debt, and $30m of fees, so $1,030m of uses in total. Sources: $50m of the target's own cash plus $600m of new debt is $650m, so the acquirer must fund the remaining $380m from its own balance sheet. Sources and uses always tie, and fees are the line people forget.

• Uses: 800 equity plus 200 refinancing plus 30 fees equals $1,030m
• Sources so far: 50 target cash plus 600 new debt equals $650m
• Balancing figure: acquirer cash of $380m
• Existing debt is a use only if it is actually refinanced at close
• Fees belong in uses and are frequently omitted

Whether you treat the refinancing of existing debt as a use and remember fees. Both are common omissions that make the schedule fail to tie.

Because accretion depends on the multiple paid against the acquirer's own multiple, not on the size of the premium. If the acquirer trades at 25 times and the target at 12 times unaffected, a 40% premium takes the purchase multiple to 16.8 times, still comfortably below 25, so it is accretive. You would need a premium above roughly 108% before the purchase multiple reached 25 times and the deal turned dilutive.

• Accretion compares the P/E paid with the acquirer's P/E
• A 40% premium on 12x gives a purchase multiple of 16.8x
• 16.8x is below 25x, so the deal is accretive
• Breakeven premium here is 25 over 12 less one, about 108%
• The premium is measured against the target's price, not the acquirer's multiple

Whether you separate the premium from the multiple paid. Assuming a large premium means dilution is the single most common misconception in this area.

Accretive. The acquirer is issuing stock at a five percent earnings yield, the inverse of twenty times, and buying earnings at a six point seven percent yield, the inverse of fifteen times. It picks up more earnings than it gives away, so EPS rises. But that says nothing about whether the deal creates value. Accretion here is an arithmetic consequence of the multiples, not evidence the acquisition was a good idea.

• Accretive
• One over 20 is a 5% cost of the stock issued
• One over 15 is a 6.7% yield on earnings acquired
• You acquire cheaper earnings than you issue
• The caveat matters: accretion does not equal value creation

Whether you volunteer the caveat. Everyone gets the arithmetic. The caveat is what distinguishes the answer.

In a stock purchase the buyer acquires the equity of the target and inherits everything, including all liabilities, known and unknown. In an asset purchase the buyer picks specific assets and assumes only specified liabilities, which limits exposure and usually gives a tax step-up in the asset basis. Buyers generally prefer asset deals, sellers generally prefer stock deals, and the price reflects who wins that argument.

• Stock purchase: buy the entity, inherit all liabilities
• Asset purchase: cherry-pick assets, assume only named liabilities
• Asset deals usually give the buyer a tax step-up in basis
• Sellers prefer stock deals, often for better tax treatment
• The structure is priced, it is not a free choice

Whether you know each side prefers the opposite structure and that the price adjusts for it.

A break fee is paid by the target to the buyer if the target walks away, typically one to three percent of equity value, usually because the board accepted a superior proposal. A reverse termination fee runs the other way: the buyer pays if it fails to close, most often on an antitrust failure or lost financing. Both compensate sunk costs, and the reverse fee often caps the buyer's liability.

• Break fee: target pays buyer, usually on a superior proposal
• Typically one to three percent of equity value
• Reverse termination fee: buyer pays target for failing to close
• Common triggers are antitrust denial and financing failure
• Reverse fees are often larger and can cap the buyer's exposure

Whether you know which way each fee flows and what actually triggers it. Getting the direction backwards is a common slip.