Mergers & Acquisitions (M&A) are often an answer to broader problems during case interviews

Merger & Acquisition cases are best practiced using mock interviews

Many growth strategy case studies eventually lead to M&A questions. For instance companies, with excess funds, searching for ways to grow quickly might be interested in acquiring upstream or downstream suppliers (vertical integration), direct competitors (horizontal integration), complementary businesses or even unrelated businesses to diversify their portfolio. The most important requirement for an M&A is that it must increase the shareholders' value and it must have a cultural fit even when the decision financially makes sense.

Analogous to making a purchase at a grocery store, M&A can be viewed as a "buying decision". In general, we know that a consumer first determines the "need" to buy a product followed by analyzing whether he or she can afford the product. After analyzing the first 2 critical factors, the consumer might look at long/short term benefits of the product. Applying similar logic in M&A cases:

  1. Why does the company want to acquire ?
  2. How much is the target company asking for its purchase price & is it fair (see cost-benefit analysis)? Can the acquiring company afford to pay the valuation?. Financial valuation will generally include industry & company analysis
  3. Benefits - potential synergies
  4. Feasibility and risks (cultural and economical)

Key areas to analyze: assets, target, industry, and feasibility

When you are sure that it is an M&A case, proceed with the following analyses after structuring the case as discussed above:

Analyze the client’s company

  • Why does the client want to acquire? Potential reasons could be the following:
    (a) Strategic (market position, growth opportunities, diversification of product portfolio)
    (b) Defensive (acquisition by another competitor could make the competitor unconquerable)
    (c) Synergies/value creation (cost saving opportunities such as economies of scale, cross-selling, brand)
    (d) Undervalued (ineffective management, unfavorable market, and the client has the power to bring the target company to its potential value)
  • In which industry does the client operate?
  • Which other businesses does the client possess? Lookout for synergies?
  • What are the client’s key customer segments?

Analyze the target industry

Once it's clear why the client is interested in acquiring a particular company, start by looking at the industry the client wants to buy. This analysis is crucial since the outlook of the industry might overshadow the target's ability to play in it. For instance, small/ unprofitable targets in a growing market can be attractive in the same way as great targets can be unattractive in a dying market.

Potential questions to assess are:

  • Can the market be segmented and does the target only play in one of the segments of the market?
  • How big is the market?
  • What are the market’s growth figures?
  • What is the focus? Is it a high volume/low margin- or a low volume/high margin market?
  • Are there barriers to entry?
  • Who are the key competitors in the market?
  • How profitable are the competitors?
  • What are possible threats?

Use Porter's Five Forces as a suitable framework here. You should use it without ever mentioning Porter's name.

Analyze the target company

After analyzing the target industry, understand the target company. Try to determine its strengths and weaknesses (see SWOT analysis) and perform a financial valuation to determine the attractiveness of the potential target. You are technically calculating the NPV of the company but this calculation likely is not going to be asked in the interview. However, having the knowledge of when it is used (e.g., financial valuation) is crucial. Analyze the following information to determine the market attractiveness:

  • The company’s market share
  • The company’s growth figures as compared to that of competitors
  • The company’s profitability as compared to that of competitors
  • How can current businesses from the client leverage revenues and profitability from the business to be acquired (keyword synergies)?
    1. Does the company possess any relevant patents or other useful intangibles (see Google purchasing Motorola)?
    2. Which parts of the company to be acquired can benefit from synergies?
  • The company’s key customers
  • Valuation

Analyze the feasibility of the M&A

Finally, make sure to investigate the feasibility of the acquisition.

Important questions here are:

  • Is the target open for an acquisition or merger in the first place? If not, can the competition acquire it?
  • Are there enough funds available (have a look at the balance sheet or cashflow statement)? Is there a chance of raising funds in the case of insufficient funds through loans etc.
  • Is the client experienced in the integration of acquired companies? Could a merger pose organizational/management problems for the client?
  • Are there other risks associated with a merger? (for example think of political implications and risks of failure, like with the failed merger of Daimler and Chrysler)

Conclusion

You should now be able to evaluate the venture’s financial and qualitative attractiveness for the client. If you conclude that the client should go on with the M&A, make sure to structure your conclusions in the end. Your suggestions should also include:

  • potential upsides of the merger
  • potential risks and how are we planning to overcome/mitigate them

Keen on cracking an M&A case now? Have a look at Chip equity or General holding

7 Comment(s)
November 12, 2016 21:29 -
Sam

Steven, I think it makes more sense to analyse the client company first. This is so that any information you then acquire regarding the acquisition target can be related to what you already know about the client, and you can synthesise as you go along about obvious synergies or vice versa. It would also permit better definition of the clients strengths and weaknesses and enable your questioning to be more targeted.

October 13, 2016 21:44 -
Steven

I'm interested in people's feedback on what they think about the order of assessment (client, industry, then acquisition target). It seems that in order to answer the client's question of whether to buy/merge, researching the details of the acquisition target would make sense first. What do you think makes the most logical sense?

February 28, 2016 04:01 -
Amanda

M&A is quite a interesting topic for the business world. Beside all the points listed above, the M&A idea and the preliminary action could actively bring companies, either the acquire or targeted company a vigor for its business in a proactively or pushed way, in order to benefit for both sides, also the healthy activeness of the business market.

November 30, 2015 14:41 -
Falco

Could you elaborate on synergie advantages more? (I recently had an interview where I got quite detailed questions about synergies including ease of implementation and value of benefits, including calculations)

December 11, 2014 05:11 -
ritika

Hi Arne, you are right. Financial valuation is crucial in M&A case. While this was implied in our previous discussion, we have now updated the section to explicitly include "financial valuation" in the beginning of the case.

December 11, 2014 01:13 -
Arne

Valuation / price might be interesting to assess when analysing the target firm

June 05, 2014 14:49 -
Gregg

What about the price?

Related consulting question(s)
Best answer so far out of 2 answers:
Peter
Expert
Ex-Bain & Company Case Team Leader * Placed 40+ MBB candidates as Partner in Europe's leading top-tier Consulting recruiting firm

You never want to use a pre-thought out framework in a case, so I would throw out any notions of having anything ready. What you'll find is the case will be laid out in a way which means that you don'... (more)

It is similar to the generalist interview. But it would be a plus if you show quick and accurate on numbers. Pay attention to behavior.

Related case(s)

General Holding

Solved 15.8k times | Rating: (4.3 / 5.0) |

Our client is a French holding company with annual revenues of about €1 billion. Their portfolio consists of different companies that are mostly in manufacturing industries such as the oil & gas industry and the automotive industry.They do not have a specific investment focus. They prefer t ... Open whole case

Chip equity

Solved 14.4k times | Rating: (4.5 / 5.0)

Our client is an electronics holding called Chip’n’Chip. They want to invest in a Printed Circuit Board (PCB) manufacturer called OnBoard, and asked you whether it’s going to be a good investment. How would you help them? Open whole case

Paper Print

Solved 6.3k times | Rating: (4.2 / 5.0)

A printing company is planning to take over another printing company with similar technology and printing machines. The candidate is supposed to evaluate the acquisition by answering a line of questions that are presented in the “suggested approach” section. Open whole case

SuperBurger

Solved 1.2k times | Rating: (5.0 / 5.0)

Our client is SuperBurger, a fast food chain that operates in the same class as McDonalds, Wendy's, Burger King and so on. They're the fourth largest fast food chain worldwide in terms of number of stores in operations. SuperBurger owns some of its stores, but 85% of its stores are owned by ... Open whole case

REA Reinsurance

Solved 600+ times | Rating: (5.0 / 5.0)

Your client, REA, is a reinsurance company. REA recently acquired another reinsurance company (approximatively same size): the choice of this company was notably based on its product portfolio as well as its market presence which appeared complement with REA. However, the acquisition is not we ... Open whole case