How would you answer this interview question - What to think
I was recently asked this question in an interview for an analyst position in the M&A group:
Why would a buyer engage in a transaction that's dilutive?
I think the correct answer is something along the lines of dilutive in the short run, but Accretive in the long run. But are there other explanations why this may be the case?
Do any of these reasons stand?
1) a strategic move - a situation where if you don't, one of your competitors will and that's worse for you in the long run
2) gain market share - become market leader
What do you guys think? Thanks!
Those reasons aren't bad. Possible synergies as well.
It can't be synergies right? don't you account for synergies in the model?
When looking at the bigger picture there is only ONE answer to every business deal ever made. To maximize profit.
That's not true at all
I think those answers are sufficient. I'm sure facebook's acquisition of instagram was "technically" dilutive; however, it was a preemptive acquisition. if they did not purchase instagram, google would have.
Did the interviewers give you any feedback?
thanks for everyone's feedback! the interviewer emphasized a lot of how the deal must be accretive in the long run if it is dilutive in the short run. I am just not sure if these other explanations are also valid.....
Monkeyinsuit, you're right, it's not synergies, because you would indeed factor those into your accretion/dilution analysis. The two reasons you stated are relatively good, although I feel #2 is a subset of #1.
Connor, "maximize profit" is technically wrong, because it leaves out a key factor in valuation: how much you pay to "own" the profit. If the deal is dilutive, then the implication is that the acquiring company is "overpaying" for the profit on a multiples basis relative to its own trading multiple. Management's job is technically to maximize VALUE, which oddly enough, does not necessarily mean maximizing PROFIT. For instance, if you reduce profit by derisking your business and getting rid of profitable but risky subsidiaries, the multiple your business trades at could theoretically increase sufficiently to more-than-compensate you for the lost profit.
A very simple reason for doing a dilutive deal has to do with the flaw at the heart of accretion/dilution analysis. When someone calls a deal "dilutive," they generally mean the deal is EPS dilutive. Anytime an acquirer trades at a lower P/E multiple than the target (based on offer value), the deal will be EPS dilutive to the acquirer's shareholders. That does not mean the deal is necessarily VALUE dilutive, however, since the target may warrant the higher multiple and, in theory (assuming the public markets are efficient, which is not always true), the combined company should trade at a blended multiple.
re-ib-ny...thanks for your feedback; very insightful
THanks for all. I have got some my ideals. I hope it's useful.
We also find them more same at:Accounting executive interview questions
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