Toughest Technical Interview Question? -- How do you structure an M&A/IPO deal?

SOAB's picture
Rank: Senior Chimp | banana points 27

A friend of mine who was interviewing for a investment banking summer analyst position with a top-tier bulge bracket investment bank (in Hong Kong) got completely shattered by this unexpected question, "How do you structure an M&A/IPO deal?" After days of discussions we still could not find a plausible answer to this question.

Would really appreciate if anyone on the forum can share any idea on this one.

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Comments (19)

Dec 17, 2017

They really kill you with technicals in SE Asia haha

    • 3
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Dec 21, 2017

hong kong covers greater china, not sea

Dec 22, 2017

Haha I was talking about my experiences in SG, should have said Asia lol my bad

Dec 22, 2017

-

nobody is as dank as me

Dec 29, 2017

lol. I think the general hiring landscape in Asia is heavily focusing on technical questions, at least in Hong Kong and China.

People act how they should :)

Dec 17, 2017

I would have asked the interviewer to consider rephrasing the question as an M&A deal is very different to an IPO.

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Dec 21, 2017

agree. many full times in hong kong r really shit, and just ask senseless questions to embarrass interviewees.

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Dec 17, 2017

What were the answers you tried?

For M&A, wouldn't be how you pay for the deal? or how you plan on buying the asset (share acquisition vs asset acquisition)? Will you set up an off-shore SPV for it to be tax efficient e.g. funneling it through Cayman's/BVIs (e.g. AB inBev - SAB MIller used an SPV)

For IPOs, same answer with the SPVs (e.g. for DCM - i know its unrelated but logic applies - China Orient AM raises debt via some investment vehicle called China Bright Company (or something similar) in the BVIs)

Maybe its about the time line?

nobody is as dank as me

    • 2
Dec 29, 2017

Thanks dank.knight. These are two separate questions actually, one is for M&A and the other is about IPO. I really love your idea of share vs. asset acquisition and setting up a SPV. As a matter of fact, from suggestions gathered from a bunch of other senior investment bankers that I knew (who are also heavily engaged in the recruitment process), some plausible answers include a lot of yours, such as the SPV thing, share or asset acquisition, cash/stock mix, earn-outs and the timing of planned execution.

People act how they should :)

Dec 17, 2017

That's APAC IBD for ya...

Dec 17, 2017

Maybe the interviewer was asking for the criteria that you would use to determine the ideal structure of a deal.
An expected output of a merger model would be the EPS accretion / dilution sensitivity table analysis with respect to the share of the purchase price paid in cash vs in stock.
Another set of criteria are those required by banks: EBIT/interest expense > 4, ND/EBITDA < 3, Debt/Equity < 1 and so on.
Sensitivity tables on all those criteria would allow you to determine which options are acceptable to all stakeholders.

Dec 21, 2017

This question is either very hard, or medium difficulty... but either way, it's not well asked as it talks about M&A/IPO together when they are completely different.

Maybe this is just a matter of walking through basics of how each type of deal works i.e. how capital flows through system and for what purpose.....

Dec 21, 2017

I guess I'll answer since the other chimps are dumb as a pack of apes.
You don't do an M&A & IPO deal together. M&A is intended to merge two companies either strategically for synergy or financially for growth/exit ops.

An IPO is part of an exit op.

As far as structuring, M&A is usually structured with varying tiers of debt tranches, mezz, convertible bonds, and equity stakes.

IPO is structured several ways, one being firm commitment, dutch auction, and so forth.

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Dec 21, 2017

r/IAmVerySmart

Gimme the loot

Dec 29, 2017

You are right. The interviewer asked my friend on the M&A first and then IPO next immediately. Sorry for not pointing that out in the question. Anyway, thanks for the thought on the financing part of M&A, definitely agree with it. And yes, for the IPO part you can't forget to mention the underwriting methods (firm commitment, best effort, bought deal). Yet in terms of the structure of the listing, there are way a lot more to ramble on such as shell companies (back-door listing) and time line management.

People act how they should :)

Jan 1, 2018

I disagree.

Bain Cap concurrently ran an M&A + an IPO when they partially exited Worldpay in 2015. It's called a dual track.

Obviously, you have to choose one in the end though.

nobody is as dank as me

Dec 21, 2017

All cash baby. AAAAALLLLLLLL cash.

Best Response
Dec 21, 2017

Assuming you aren't misquoting the original question, I would first ask the interviewer if you could ask a few questions for clarification.

The exchange could go something like this:

Interviewer: How do you structure an M&A/IPO deal?

You: That's a tough question, as they are very different transactions. Do you want me to cover my thoughts on both, or did you have a sample transaction you wanted to discuss?

Interviewer: I don't really care, I'm just seeing if you know the difference and what both types of transactions generally look like.

You: In that case, I think IPOs are mechanisms for owners of private companies to raise capital from the public equity markets and provide liquidity to existing shareholders. In the case of a merger, I think there are few true 'mergers', and that most transactions are really acquisitions. It's my understanding that mergers are defined as occurring between two companies of roughly similar size, where the preponderance of both firms remain even after operational synergies are realized a couple years after the transaction. I think acquisitions are very broad, and can occur between a number of different counter-parties who have different reasons for doing deals. A financial sponsor usually structures a deal differently than a corporation, for instance. They may need to sell a portfolio company due to legal restrictions on the fund's lifespan. Or maybe they want an early exit to juice their IRR because they get compensated off that metric, and they'd like to start squirreling away some money into their carry pool. For companies, maybe they're cash rich, and don't know what to do with their money. Maybe they have little cash, but think debt is cheap, and that now is the right time to buy something before the market turns. Maybe they're buying something opportunistically, or maybe the founder is being profligate with the firm's money. There are too many scenarios to consider to talk intelligently about deal structure, without understanding deal rationale.

Interviewer: I guess I meant to ask if you knew the difference between a share purchase agreement and an asset purchase agreement, but thanks for rambling incessantly without clarifying.

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Dec 29, 2017

People act how they should :)