Buy‑Side M&A

In finance, Mergers & Acquisitions (M&A) refers to the process where companies are combined or acquired to achieve strategic growth, efficiency, or market advantages.

Mergers and acquisitions (M&A) transactions have a buy-side and a sell-side. The sell-side team represents the seller and works to market the business to potential buyers, while the buy-side team represents the acquirer. For the buyers or acquirers, the focus is on acquiring the right target with minimal risk and maximum strategic or financial upside. So it requires a lot of due diligence, valuation analysis, and strategic assessment.

Read on to understand the entire buy-side M&A process and get some practice questions to prepare for finance interviews.
 

What Is a Buy-Side M&A Process?

The buy-side M&A process refers to all the steps a company, private equity firm, or investor goes through to identify, evaluate, and acquire a target company. Most buyers work with investment banks or advisory firms to ensure a successful acquisition that maximizes value and aligns with their strategic or financial objectives. The process is as much about avoiding bad deals as it is about finding good ones.
 

Buyer Motivation and Acquisition Strategies in Buy-Side M&A

Buyers pursue acquisitions for many reasons, but the two primary drivers are synergies and return on investment.

Strategic buyers who are usually companies within the same or adjacent industries are motivated primarily by synergies. These are the benefits a buyer expects from combining two businesses. They can be cost synergies, such as reducing overhead by merging operations and consolidating facilities, or revenue synergies, like cross-selling products to each other’s customer base.

For financial buyers or sponsors like private equity firms, the major motivation is return on investment. They look for companies with strong cash flow generation, opportunities for operational improvement, or potential for add-on acquisitions that build platform value.

In most cases, the buyer's motivation affects integration which is all about how the acquired company will be absorbed into the buyer’s operations. Some acquisitions involve full integration, where the target is merged into the buyer’s existing business, while others keep the target as a standalone subsidiary. The chosen strategy depends on the buyer’s objectives, the target’s capabilities, and cultural fit.
 

Key Steps in the Buy-Side Process

A buy-side process follows a clearly structured sequence that guides buyers step by step through the transaction; from the initial definition of their acquisition criteria to the final closing.
 

1. Defining Acquisition Criteria

Based on the buyer's motivation, the buy-side process typically starts with defining acquisition criteria. This means setting clear, specific guidelines that describe the ideal characteristics of a company to acquire. It includes factors like industry, size, financial performance, geographic location, growth potential, and strategic fit with business goals.

2. Target Screening

Then target screening begins, where potential acquisition candidates are identified based on the acquisition criteria. This stage usually involves building a long list of potential targets and narrowing it down through preliminary analysis.

3. Due Diligence

Once a target is identified, the buy-side team conducts due diligence. This is a detailed investigation into the target’s financials, operations, legal position, and market outlook. It is crucial for verifying the accuracy of the information provided and uncovering any hidden risks.

4. Valuation

Valuation follows, where the buyer estimates the target’s worth using methods such as Discounted Cash Flow (DCF), comparable company analysis, or precedent transactions. The valuation informs the buyer’s initial offer and negotiation strategy.

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5. Negotiation

During negotiation, the buyer works to agree on a fair price and favorable terms, often documented first in a Letter of Intent (LOI) before moving to a definitive agreement.

6. Signing and Closing

The last step is signing and closing the deal. During this final phase, all contractual and regulatory requirements are fulfilled and funds transferred. The seller formally transfers the ownership to the buyer.
 

Form of Financing and Deal Structure in M&A

In any acquisition, the buyer must decide how to pay for the purchase or form of financing and what exactly to buy (deal structure). These are separate decisions, but they influence each other.

Let’s take a look at the most common forms of financing for buyers:

• A cash deal uses the buyer’s available funds or borrowed money to pay for the acquisition outright.
• Debt financing involves borrowing from banks or issuing bonds.
• Equity financing means issuing shares to raise capital.
• Leveraged buyouts (LBOs) use borrowed funds secured against the target’s assets to minimize upfront capital. 

Other options include mezzanine financing, a hybrid of debt and equity, asset-based lending, and earnouts, where part of the payment is dependent on future performance. Often, buyers use a combination of these methods to balance risk and maintain financial flexibility.

Deal structure defines what the acquirer buys and it can either be a stock purchase or asset purchase. In a stock purchase, the buyer acquires the target’s shares, taking over the entire company, including its assets and liabilities. In an asset purchase, the buyer acquires specific assets, and possibly certain liabilities, without taking on the entire company. This allows the buyer to avoid unwanted obligations but can be more complex to execute, as each asset must be transferred individually and certain approvals may be required.
 

Buy-Side Valuation in M&A

Valuation on the buy-side determines what a target company is worth. Most importantly, it helps in deciding what the deal is worth to the buyer. The team uses multiple valuation methods, including discounted cash flow (DCF) analysis, comparable company analysis, precedent transactions, asset-based valuation, and sometimes leveraged buyout (LBO) models.

To clearly tell what the target is worth to the buyer, the valuation process on the buy-side factors in projected synergies, integration costs, and the buyer’s required return on investment. Buy-side valuations are typically more conservative than sell-side valuations, as buyers aim to minimize risk and avoid overpaying.
 

Merger Consequences Analysis in Buy-Side M&A

Before committing to a deal, buyers often perform a merger consequences analysis which is a financial evaluation used to understand the impact of a merger or acquisition on the acquiring company’s financials, particularly on earnings per share (EPS).

The analysis involves comparing the standalone EPS of the buyer with the combined pro forma EPS after the merger. Pro forma EPS is a way to calculate a company’s earnings per share as if a merger or acquisition has already happened. It combines the net incomes of both the buyer and the target, adjusts for any new shares issued in the deal, and factors in expected synergies or costs. This projected EPS shows what the combined company’s earnings per share would be after the transaction. 

As a result, the buyer can tell whether the acquisition will be accretive or dilutive. An acquisition is accretive if the combined pro forma EPS is higher than the buyer’s standalone EPS, meaning the deal increases earnings per share and potentially adds value to shareholders. If acquisition is dilutive, it means the pro forma EPS is lower than the standalone EPS. This means the deal reduces earnings per share and might decrease shareholder value in the short term.

Other considerations in merger consequence analysis include the effect on return on investment, leverage ratios, and whether the acquisition might trigger regulatory or competitive concerns.
 

Common Interview Questions on Buy-Side M&A

Here are some of the most common interview questions on buy-side M&A to help you prepare.

1. Walk me through an M&A deal on the buy-side.

On the buy-side, the process starts with defining acquisition criteria and screening potential targets. Once a target is identified, preliminary valuation and due diligence are conducted, assessing strategic fit and risks. With sufficient target information, the next step is to build merger models to evaluate the effects of the acquisition. If it passes, the buyer’s team can negotiate terms, arrange financing, and sign the purchase agreement. Then close the transaction and focus on post-merger integration to realize synergies and value.

2. Why would a company want acquire another company?

Common reasons include achieving cost or revenue synergies, expanding market share, acquiring new technologies, entering new markets, diversifying products, and accessing talent or intellectual property.

3. How do you determine the purchase price for a target company?

Determining the purchase price requires the use of valuation methods such as DCF, comparable company analysis, and precedent transactions. The final price reflects both intrinsic value and strategic value, adjusted for synergies, competitive bidding, and the seller’s negotiation leverage.

4. What happens if a company overpays when acquiring another firm?

When a company pays too much in an acquisition, it is referred to as an overpayment. In this case, the purchase price exceeds the actual or sustainable value of the target company. This creates a risk that the expected return on investment (ROI) will not be achieved.

The reason: the buyers must reflect the high purchase price on their balance sheet. The difference between the price paid and the target company’s book or market value is recorded as goodwill. If it later turns out that the acquired company is less profitable than expected or that synergies cannot be realized, this goodwill must be partially written down.

These impairments often significantly reduce earnings. As a result, the buyer’s profitability declines, and shareholders see weaker results than anticipated. This can lead to dissatisfaction among investors, as the acquisition fails to deliver the expected value.

In the long run, this may also impact the capital markets: analysts and investors may take a more skeptical view of the stock, and the buyer’s share price may come under pressure. An overpayment can therefore lead not only to short-term profit declines but also to a long-term destruction of corporate value.

5. Is it easier to achieve revenue synergies or cost synergies?

Cost synergies are generally more reliable and easier to achieve because they are within management’s control, such as eliminating redundancies. Revenue synergies depend on market response and execution, making them more uncertain.

6. Why would a company that’s capable of paying 100% in cash for another choose not to go for all cash?

They might preserve cash for other investments, maintain liquidity for downturns, diversify financing sources, or take advantage of cheap debt. Using stock can also share risk with the seller, bring about tax efficiencies, or be strategically advantageous.

7. How do you know whether an acquisition will be accretive or dilutive?

Accretive means the acquisition increases the buyer’s earnings per share (EPS) after the deal closes. Dilutive means it decreases the buyer’s EPS. Investors usually prefer accretive deals because they boost earnings per share right away.

The rule of thumb in calculating whether an acquisition will be accretive or dilutive is to compare the buyer’s and the target’s price-to-earnings (P/E) ratios, along with the payment method and financing costs. If the buyer has a higher P/E ratio than the target, the deal is likely accretive; otherwise, it might be dilutive. However, the full answer requires running a detailed financial merger model that accounts for synergies, deal structure, and costs.

8. Why do most M&A deals fail to be accretive?

Deals fail to be accretive due to overpayment, missed synergies, integration challenges, rising costs, or revenue shortfalls.

9. Why would an acquisition be dilutive?

An acquisition would be dilutive if it lowers the buyer’s EPS, typically due to overpaying, issuing dilutive equity, if synergies don’t materialize, or higher than expected integration costs.

10. If a company with a higher P/E acquires one with a lower P/E, is this accretive or dilutive?

If everything else is equal, it’s accretive, because the buyer is effectively purchasing earnings at a cheaper multiple than its own valuation.

👉 Looking for more questions to prepare for your interviews in investment banking, private equity, venture capital or corporate finance? Check out our Case Library!

Key Takeaways

The buy-side M&A process refers to the steps a buyer and their partners take to acquire a company. It begins with defining acquisition criteria or the ideal traits a target company must have to be considered. Then the search for firms that meet the criteria starts. The buyer team does preliminary analysis to filter out the list of potential firms and identify a top target. 

Once they have an ideal target, they conduct due diligence by evaluating all the materials provided by the sell side team. This stage allows the buy side team to verify documents including financial reports for accuracy and discover hidden risks if any. If they want to proceed, they value the target company to suggest an initial offer and have a basis for negotiations. In case the negotiations are fruitful, the last step is signing and closing the deal.

Strategic acquirers are often willing to pay more for a company than a financial sponsor or private equity firm would. They can justify a higher price because they can realize operational synergies and revenue growth that financial sponsors cannot. These synergies increase the combined company’s cash flows, creating more intrinsic value than a PE firm focused mainly on financial returns.