Max Leverage M&A Technical Interview Question
Was asked this question in a BB interview recently and don't believe I've seen anything similar in the guides. Was hoping someone could help me understand how to find the answer:
We have a company looking to make an acquisition. They have:
$100m EBITDA
$300m Debt
A max leverage ceiling of 5x Debt/EBITDA
What is the maximum they can pay for an acquisition target, assuming they have to pay 20x EBITDA to make an acquisition?
Any thoughts on how to solve would be much appreciated monkeys, thank you
It’s easy. Sometimes I’m surprised of these technical questions. Assuming no synergies and all debt acquisition. This is also called a “firepower analysis”. You gave a couple of equations to solve. (1) PF debt = 300 + 20 * (EBITDA_target);
(2) PF EBITDA = 100 + EBITDA_target;
(3) PF debt / PF EBITDA = 5;
So basically (300+20X)/(100+X)=5. —> now solve for X. This is high school math. Max Target EBITDA = 13.3, max acquisition price is 266. So PF debt is 566, PF EBITDA is 113, and PF leverage is 5x.
Btw, don’t know why formatting of answer comes that way. It doesn’t let me break lines, so have to put extra spaces...
I've never heard of the term firepower analysis, that's interesting.
Worked in CB before IB and we thought through and puts slide together on debt capacity / acquisition capacity quite often. First I feel like we’re missing some info or the way you remember the question is slightly off. The max they can pay is 20x whatever the targets EBITDA is since they gave you the purchase multiple. But I’m assuming what they wanted to know was what the max the company pay in debt before an equity check is required. To know that I would ask the interviewer for the targets EBITDA (we need to know the PF EBITDA so we can figure out the max debt level) so say they tell you that targets EBITDA is $50MM, I would tell them in that case to keep it simple PF EBITDA is $150MM (just target + buyers EBITDA, excluding any impact of synergies for simplicity). We know max leverage is 5x so 5x the $150 gets you to the max debt level the company can achieve (which is $750 in this case). Purchase price is 20x the targets EBITDA of $50 so $1,000. The max amount of debt we can have is $750 and we already have $300 of debt at the buyers level so we can only raise an additional $450 of debt before we go above 5x max leverage. Acquisition price is $1,000 and we can only raise $450 in debt so we need to pay a $550 equity check as well to finance the deal. That’s how I would think about it
I like the answer of the first poster as well, another way to think about it. Typically the targets EBITDA was one of the variables getting sensitized as for us this type of analysis was useful to talk through the financing scenarios of different sized targets and was nice to see at what point the equity check kicked in but if assuming all debt the first posters answer works too
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