The investment banking interview question we’re going to go over today is “Walk me through a merger model”. This is also known as “Walk me through an M&A analysis”. It is a standard question that comes up very frequently. We’re going to show you exactly how you should answer it.
“The purpose of the merger model is to evaluate whether the transaction will be beneficial to the company’s earnings. Before we begin, we should have the acquirer’s standalone Earnings per Share before the M&A transaction.
The first step in a merger model is to determine the purchase price. Second, we need to build the Sources and Uses section, so that we know how the acquirer will finance the transaction: whether it’s done through cash, debt or stocks. Next, we should add up the acquirer and the target’s standalone financials, such as Revenue and COGS, and make pro forma transaction adjustments. Some examples of these adjustments are Revenue Synergies, Cost Synergies and Incremental Interest Expense. This would give us the acquirer’s Earnings per Share after the M&A transaction.
Once that’s done, we can compare the Earnings per Share before and after the M&A transaction to determine whether the deal is accretive or dilutive.”
And that’s how you answer the question: “Walk me through a merger model”! The key mistake to avoid here is don’t be long-winded. In other words, don’t go into every little detail of the merger model. Don’t go into granular stuff like goodwill creation, line-by-line calculations. Some candidates spend several minutes talking the interviewer through the merger model and that’s not what you want to do. The sample answer we gave you above is basically what you want to deliver in a real interview. You just want to show the interviewer that you understand the purpose of the merger model and how it flows.