M&A Final Exam Questions and Correct
Answers
Can you define M&A and explain the difference between a merger and an acquisition?
✅Mergers and acquisitions (M&A) is an umbrella term that refers to the combination of
two businesses. To buyers, M&A serves as an alternative to organic growth, whereas
for sellers, M&A provides an opportunity to cash out or share in the newly formed
entity's risk/reward. The two terms are often used interchangeably but have some minor
differences: Merger:A merger suggests the combination of two similarly sized
companies (i.e., "merger of equals"), where the form of consideration is at least partially
with stock, so shareholders from both entities remain. In most cases, the two companies
will operate under a combined name (e.g., ExxonMobil, Kraft Heinz, Citigroup), whereas
sometimes the new combined entity will be renamed. Acquisition:An acquisition typically
implies the target was of smaller-size than the purchaser. The target's name will usually
slowly dissipate over time as the target becomes integrated with the acquirer. In other
cases (e.g., Salesforce's acquisition of Slack, Google's acquisition of Fitbit), the target
will operate as a subsidiary to take advantage of its established branding
What are some potential reasons that a company might acquire another company?
✅Value Creation from Revenue and Cost Synergies
Ownership of Technology Assets (IP, Patents, Proprietary Technology)
Talent Acquisitions (New Skilled Employees)
Expansion in Geographic Reach or into New Product/Service Markets
Diversification in Revenue Sources (Less Risk, Lower Cost of Capital)
Reduce Time to Market with New Product Launches
Increased Number of Channels to Sell Products/Services
Market Leadership and Decreased Competition (if Horizontal Integration)
Achieve Supply Chain Efficiencies (if Vertical Integration)
Tax Benefits (if Target has NOLs)
What are the differences among vertical, horizontal, and conglomerate mergers?
✅Vertical Merger:A vertical merger involves two or more companies that serve
different value chain functions. From the increased control over the supply chain, the
combined entity should theoretically eliminate inefficiencies.
,Horizontal Merger:A horizontal merger comprises a merger amongst companies directly
competing in the same (or very similar) market. Thus, following a horizontal merger,
competition in the market decreases (e.g., Sprint & T-Mobile merger). Notable benefits
that stem from a horizontal merger are the increased geographical coverage to sell
products/services and an increase in pricing power.
Conglomerate:A conglomerate refers to the combination of multiple business entities
operating in unrelated industries for diversification purposes - an example would be
Berkshire Hathaway.
In terms of vertical integration, what is the difference between forward and backward
integration? ✅Backward Integration:When an acquirer moves upstream, it means
they're purchasing suppliers or manufacturers of the product the company sells - this is
known as backward integration.
Forward Integration:When an acquirer moves downstream, it means they're purchasing
a company that moves them closer to the end customer such as a distributor or
technical support - this is known as forward integration
What are synergies and why are they important in a deal? ✅Synergies are the
expected cost savings or incremental revenues arising from an acquisition. They're
important because if an acquirer believes synergies can be realized, a higher premium
would be paid.
1. Revenue Synergies:Cross-selling, upselling, product bundling, new distribution
channels, geographic expansion, access to new end markets, reduced competition
leads to more pricing power
2. Cost Synergies:Eliminate overlapping workforces (reduce headcount), closure or
consolidation of redundant facilities, streamlined processes, purchasing power over
suppliers, tax savings (NOLs
Why should companies acquired by strategic acquirers expect to fetch higher premiums
than those selling to private equity buyers? ✅Strategic buyers can often benefit from
synergies, which enables them to offer a higher price. However, the recent trend of
financial buyers making add-on acquisitions has enabled them to fare better in auctions
and place higher bids since the platform company can benefit from synergies similar to
a strategic buyer
How do you perform premiums paid analysis in M&A? ✅Premiums paid analysis is a
type of analysis prepared by investment bankers when advising a public target, in which
the average premium paid in comparable transactions serves as a reference point for
an active deal. The presumption being the average of the historical premiums paid in
those comparables deals should be a proxy (or sanity check) for the premium to be
received in the current deal.
, Tell me about the two main types of auction structures in M&A. ✅1.Broad Auction:In a
broad auction, the sell-side bank will reach out to as many prospective buyers as
possible to maximize the number of interested buyers. Since competition directly
correlates with the valuation, the goal is to cast a wide net to intensify an auction's
competitiveness and increase the likelihood of finding the highest possible offer (i.e.,
removing the risk of "leaving money on the table")
2. Targeted Auction:In a targeted auction, the sell-side bank (usually under the client's
direction) will have a shortlist of buyers contacted. These contacted buyers may already
have a strong strategic fit with the client or a pre-existing relationship with the seller.
What is a negotiated sale? ✅A negotiated sale involves only a handful of potential
buyers and is most appropriate when there's a specific buyer the seller has in mind. A
potential reason for this type of sale approach could be the seller intends to stay on and
strongly values the partnership and growth opportunities. Under this approach, the
speed of close and confidentiality are two distinct benefits. These deals are negotiated
"behind-closed-doors" and generally on friendlier terms based on the best interests of
the client
What are some of the most common reasons that M&A deals fail to create value?
✅Overpaying/Overestimating Synergies:Nearly all M&A deals involve a premium in the
purchase price. Even if the deal results in positive results, it might not be enough to
justify the premium. Overpaying for an asset goes hand-in-hand with overestimating
synergies. Synergies are challenging to achieve in practice and should be estimated
conservatively, but doing so would result in missing out on acquisition opportunities and
being out-bid. An acquirer often has to accept that the expected synergies used to
justify the premium paid may not be met for the sake of completing the deal.
Inadequate Due Diligence:An acquirer will often fail to perform sufficient diligence
before acquiring a company. The decision may have been made while overly-focused
on the target's positives and the potential post-integration benefits while neglecting the
risks. A competitive auction with a short timeline can lead to this type of poor judgment,
in which the other buyers become a distraction.
Lack of Strategic Plan:For an M&A deal, when an acquirer becomes fixated on pursuing
more resources and achieving greater scale without an actual strategy, this can lead to
synergies not being realized despite an abundance of resources on-hand and potential
growth opportunities.
Poor Execution/Integration:Post-closing, the acquirer's management team may exhibit
poor leadership and an inability to integrate the new acquisition. This poor integration
can lead to diminished employee morale, cultural mismatches, and a noticeable drop in
product/service quality. Of all the reasons M&A deals can fail, cultural compatibility can
be the trickiest risk to assess.
