The Ultimate Guide to Merger & Acquisition Case Interviews (2022)

Merger & acquisition (M&A) cases are a common type of case you’ll see in consulting interviews. You are likely to see at least one M&A case in your upcoming interviews, especially at consulting firms that have a large M&A or private equity practice.

These cases are fairly straight forward and predictable, so once you’ve done a few cases, you’ll be able to solve any M&A case.

In this article, we’ll cover:

  • The two different types of M&A cases
  • The five steps to solve any M&A case
  • The perfect M&A framework
  • An M&A case example

The Two Types of M&A Case Interviews

According to Investopedia, a merger is a business transaction that unites two companies into a new and single entity. Typically, the two companies merging are roughly the same size. After the merger, the two companies are no longer separately owned and operated. They are owned by a single entity.

An acquisition is a business transaction in which one company purchases full control of another company. Following the acquisition, the company being purchased will dissolve and cease to exist. The new owner of the company will absorb all of the acquired company’s assets and liabilities.

There are two types of M&A cases you’ll see in consulting case interviews:

  • A company acquiring or merging with another company
  • A private equity firm acquiring a company

The first type of M&A case is the most common. A company is deciding whether to acquire or merge with another company.

Example: Walmart is a large retail corporation that operates a chain of supermarkets, department stores, and grocery stores. They are considering acquiring a company that provides an online platform for small businesses to sell their products. Should they make this acquisition?

There are many reasons why a company would want to acquire or merge with another company. In making an acquisition or merger, a company may be trying to:

  • Gain access to the other company’s customers
  • Gain access to the other company’s distribution channels
  • Acquire intellectual property, proprietary technology, or other assets
  • Realize cost synergies
  • Acquire talent
  • Remove a competitor from the market
  • Diversify sources of revenue

The second type of M&A case is a private equity firm deciding whether to acquire a company. This type of M&A case is slightly different from the first type because private equity firms don’t operate like traditional businesses.

Private equity firms are investment management companies that use investor money to acquire companies in the hopes of generating a high return on investment.

After acquiring a company, a private equity firm will try to improve the company’s operations and drive growth. After a number of years, the firm will look to sell the acquired company for a higher price than what it was originally purchased for.

Example: A private equity firm is considering acquiring a national chain of tattoo parlors. Should they make this investment?

There are a few different reasons why a private equity firm would acquire a company. By investing in a company, the private equity firm may be trying to:

  • Generate a high return on investment
  • Diversify its portfolio of companies to reduce risk
  • Realize synergies with other companies that the firm owns

Regardless of which type of M&A case you get, they both can be solved using the same five step approach.

The Five Steps to Solve Any M&A Case Interview

Step One: Understand the reason for the acquisition

The first step to solve any M&A case is to understand the primary reason behind making the acquisition. The three most common reasons are:

  • The company wants to generate a high return on investment
  • The company wants to acquire intellectual property, proprietary technology, or other assets
  • The company wants to realize revenue or cost synergies

Knowing the reason for the acquisition is necessary to have the context to properly assess whether the acquisition should be made.

Step Two: Quantify the specific goal or target

When you understand the reason for the acquisition, identify what the specific goal or target is. Try to use numbers to quantify the metric for success.

For example, if the company wants a high return on investment, what ROI are they targeting? If the company wants to realize revenue synergies, how much of a revenue increase are they expecting?

Depending on the case, some goals or targets may not be quantifiable. For example, if the company is looking to diversify its revenue sources, this is not easily quantifiable.

Step Three: Create a M&A framework and work through the case

With the specific goal or target in mind, structure a framework to help guide you through the case. Your framework should include all of the important areas or questions you need to explore in order to determine whether the company should make the acquisition.

We’ll cover the perfect M&A framework in the next section of the article, but to summarize, there are four major areas in your framework:

Market attractiveness: Is the market that the acquisition target plays in attractive?

Company attractiveness: Is the acquisition target an attractive company?

Synergies: Are there significant revenue and cost synergies that can be realized?

Financial implications: What are the expected financial gains or return on investment from this acquisition?

Step Four: Consider risks OR consider alternative acquisition targets

Your M&A case framework will help you investigate the right things to develop a hypothesis for whether or not the company should make the acquisition.

The next step in completing an M&A case depends on whether you are leaning towards recommending making the acquisition or recommending not making the acquisition.

If you are leaning towards recommending making the acquisition…

Explore the potential risks of the acquisition.

How will the acquisition affect existing customers? Will it be difficult to integrate the two companies? How will competitors react to this acquisition?

If there are significant risks, this may change the recommendation that you have.

If you are leaning towards NOT recommending making the acquisition…

Consider other potential acquisition targets.

Remember that there is always an opportunity cost when a company makes an acquisition. The money spent on making the acquisition could be spent on something else.

Is there another acquisition target that the company should pursue instead? Are there other projects or investments that are better to pursue? These ideas can be included as next steps in your recommendation.

Step Five: Deliver a recommendation and propose next steps

At this point, you will have explored all of the important areas and answered all of the major questions needed to solve the case. Now it is time to put together all of the work that you have done into a recommendation.

Structure your recommendation in the following way so that it is clear and concise:

  • State your overall recommendation firmly
  • Provide three reasons that support your recommendation
  • Propose potential next steps to explore

The Perfect M&A Case Interview Framework

The perfect M&A case framework breaks down the complex question of whether or not the company should make the acquisition into smaller and more manageable questions.

You should always aspire to create a tailored framework that is specific to the case that you are solving. Do not rely on using memorized frameworks because they do not always work given the specific context provided.

For merger and acquisition cases, there are four major areas that are the most important.

1. Market attractiveness

For this area of your framework, the overall question you are trying to answer is whether the market that the acquisition target plays in is attractive. There are a number of different factors to consider when assessing the market attractiveness:

  • What is the market size?
  • What is the market growth rate?
  • What are average profit margins in the market?
  • How available and strong are substitutes?
  • How strong is supplier power?
  • How strong is buyer power?
  • How high are barriers to entry?

2. Company attractiveness

For this area of your framework, the overall question you want to answer is whether the acquisition target is an attractive company. To assess this, you can look at the following questions:

  • Is the company profitable?
  • How quickly is the company growing?
  • Does the company have any competitive advantages?
  • Does the company have significant differentiation from competitors?

3. Synergies

For this area of your framework, the overall question you are trying to answer is whether there are significant synergies that can be realized from the acquisition.

There are two types of synergies:

  • Revenue synergies
  • Cost synergies

Revenue synergies help the company increase revenues. Examples of revenue synergies include accessing new distribution channels, accessing new customer segments, cross-selling products, up-selling products, and bundling products together.

Cost synergies help the company reduce overall costs. Examples of cost synergies include consolidating redundant costs and having increased buyer power.

4. Financial implications

For this area of your framework, the main question you are trying to answer is whether the expected financial gains or return on investment justifies the acquisition price.

To do this, you may need to answer the following questions:

  • Is the acquisition price fair?
  • How long will it take to break even on the acquisition price?
  • What is the expected increase in annual revenue?
  • What are the expected cost savings?
  • What is the projected return on investment?

M&A Case Interview Example

Let’s put our strategy and framework for M&A cases into practice by going through an example.

M&A case example: Your client is the second largest fast food restaurant chain in the United States, specializing in serving burgers and fries. As part of their growth strategy, they are considering acquiring Chicken Express, a fast food chain that specializes in serving chicken sandwiches. You have been hired to advise on whether this acquisition should be made.

To solve this case, we’ll go through the five steps we outlined above.

Step One: Understand the reason for the acquisition

The case mentions that the acquisition is part of the client’s growth strategy. However, it is unclear what kind of growth the client is pursuing.

Are they looking to grow revenues? Are they looking to grow profits? Are they looking to grow their number of locations? We need to ask a clarifying question to the interviewer to understand the reason behind the potential acquisition.

Question: Why is our client looking to make an acquisition? Are they trying to grow revenues, profits, or something else?

Answer: The client is looking to grow profits.

Step Two: Quantify the specific goal or target

Now that we understand why the client is considering acquiring Chicken Express, we need to quantify what the specific goal or target is. Is there a particular profit number that the client is trying to reach?

We’ll need to ask the interviewer another question to identify this.

Question: Is there a specific profit figure that the client is trying to reach within a specified time period?

Answer: The client is trying to increase annual profits by at least $200M by the end of the first year following the acquisition.

Step Three: Create a M&A framework and work through the case

With this specific goal in mind, we need to structure a framework to identify all of the important and relevant areas and questions to explore. We can use market attractiveness, company attractiveness, synergies, and financial implications as the four broad areas of our framework.

We’ll need to identify and select the most important questions to answer in each of these areas. One potential framework could look like the following:

The Ultimate Guide to Merger & Acquisition Case Interviews (1)

Let’s fast forward through this case and say that you have identified the following key takeaways from exploring the various areas in your framework:

  • Chicken Express has been growing at 8% per year over the past five years while the fast food industry has been growing at 3% per year
  • Among fast food chains, Chicken Express has the highest customer satisfaction score
  • Revenue synergies would increase annual profit by $175M. This is driven by leveraging the Chicken Express brand name to increase traffic to existing locations
  • Cost synergies would decrease annual costs by $50M due to increased buyer power following the acquisition

Step Four: Consider risks OR consider alternative acquisition targets

At this point, we are leaning towards recommending that our client acquire Chicken Express. To strengthen our hypothesis, we need to explore the potential risks of the acquisition.

Can the two companies be integrated smoothly? Is there a risk of sales cannibalization between the two fast food chains? How will competitors react to this acquisition?

For this case, let’s say that we have investigated these risks and have concluded that none of them pose a significant threat to achieving the client’s goals of increasing annual profit by $200M.

Step Five: Deliver a recommendation and propose next steps

We’ll now synthesize the work we have done so far and provide a clear and concise recommendation. One potential recommendation may look like the following:

I recommend that our client acquires Chicken Express. There are three reasons that support this.

One, Chicken Express is an attractive acquisition target. They are growing significantly faster than the fast food industry average and have the highest customer satisfaction scores among fast food chains.

Two, revenue synergies would increase annual profit by $175M. The client can leverage the brand name of Chicken Express to drive an increase in traffic to existing locations.

Three, cost synergies would decrease annual costs by $50M. This is due to an increase in buyer power following the acquisition.

Therefore, our client will be able to achieve its goal of increasing annual profits by at least $200M. For next steps, I’d like to assess the acquisition price to determine whether it is reasonable and fair.

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