Interview Question: What Two Companies Should Merge?

Do you think it would be acceptable to pitch an LBO where there are possible synergies between the target company and another portfolio company of the specific sponsor?

Then I could talk about why an LBO makes sense, then talk about how (if you're advising the sponsor) you can secure a lower purchase price for the sponsor because most lbo models don't account for synergies between portfolio companies.

Pitch Me A Merger Interview Question

A popular interview question in investment banking interviews is for the interviewer to ask "if you were a banker - what companies would you pitch for an acquisition" (IE what company would you have buy another company). You should prepare for this interview question by doing research into two companies that would make sense working as one company.

Here are a few factors to consider when looking for a take-out target:

  • Company with strong IP
  • Company with geographical advantage in industry
  • Company with key management team
  • Company in an industry in which scale is necessary (newspapers, television, railroads)

You can then think about acquirers that would make sense for the target company - perhaps a larger and more experienced industry operator.

Alternatively, you can think of a company that has a weakness that could be solved through acquisition. IE a company that lacks exposure to a certain market or doesn't have exposure in a key product line within the industry could purchase that exposure through a smart acquisition.

Sample Acquisition Pitch

For example: Amazon acquirers Lionsgate

When pitching this idea, you need to walk through the logic in a succinct manner. For example:

Recently I have been following the consolidation in the film studio industry and I find that Lionsgate is a ripe acquisition target for a company such as Amazon that is looking to build out its Amazon Prime Streaming platform and create more original content to create a more sustainable affordable content platform. That being said, Amazon which is under-levered at around 2.5x EBITDA, would be able to take on debt to acquire Lionsgate which would offer them a film and tv studio for new productions, a back catalogue of content for their platform, and the Starz premium cable channel that could help entice new users / act as an incentive for Prime Users.

This is a solid walk through of the qualitative side of pitch. You should start with the qualitative analysis and then have some quantitative analysis prepared for further questioning. If they like your pitch they will likely follow up with more questions such as what multiple the acquisition would make sense at. You should look at some precedent transactions to see what similar companies have been acquired at.

You should also consider the financing of the transaction. As mentioned in the above quote - Amazon could acquirer this company with debt as they are relatively under-levered. You should also look at the cash position and debt position of the target company to determine what might make sense.

Should I Pitch an LBO in an Interview?

When asked for an acquisition - you should pitch a M&A scenario. You should NOT make the interview more complicated than it needs to be. This will not make you look smart as you are more likely to make a mistake if you make your pitch more complicated.

The M&A pitch will be similar in structure to the stock pitch in IB interviews. Check out a video about IB stock pitches below.

Check out more investment banking interview questions with our FREE finance interview guide.

Check out a guide to how to pitch a stock for an investment banking interview.

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Comments (38)

Jan 16, 2015

It wouldn't be a wrong answer if you explained it well, but I wouldn't advise it. In general you should aim to keep your answers as simple as the question allows. Extra complexity is unlikely to help / impress, but it could easily hurt you. The more complicated your answer, the more likely you say something dumb or you give a long-winded answer and the interviewer gets bored.

And the second part is wrong. The price paid to buy a company is not driven by what your model says it's worth, plus if you were buying for the purposes of combining the companies you'd work in synergies of course. The price you pay will depend on what others are willing to pay. If someone else is willing to pay X, you must pay X+1. That's true no matter who you are.

Jan 16, 2015

Double post

Jan 16, 2015

The NFL and the SEC (football conf)

    • 1
Jan 16, 2015

Is this question for an ib interview? If so, I would not pitch an LBO.

Jan 16, 2015

Yes IB summer Analyst.

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Jan 16, 2015

Go with traditional M&A and try to sell it.

Off the top of my head I might argue the Samung - BBRY deal. Say that BBRY has some great patents in the mobile security space, which is becoming increasingly important due to the threat of hacking, data theft etc. Maybe say that since Android has such a robust user base this could give Samsung a market differentiating asset.

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Jan 16, 2015

Thank You so much! I really appreciate it. I'm really hoping you aren't my interviewer haha

Jan 16, 2015

Starbucks and Jim Beam, or L Brands (owns Victoria's Secret) and Smith and Wesson--would make for an even better fashion show than they have now.

Jan 16, 2015

As above, don't try to impress by being overly complex - I read your post 2-3 times to make sense of it but the second part is definitely wrong. Having synergies may allow you to pay a higher price, but certainly won't allow you to secure a lower one - you would have shot yourself in the foot by saying something like that.

Jan 16, 2015

I meant that that if the model didn't take the synergies into account, then you would essentially be undervaluing the the deal. And if you were advising the sponsor that would be a good thing. But I understand that overly complex is bad.

Jan 16, 2015
Big Shot Hopeful:

I meant that that if the model didn't take the synergies into account, then you would essentially be undervaluing the the deal. And if you were advising the sponsor that would be a good thing. But I understand that overly complex is bad.

In that case, you're not "securing a lower purchase price for the sponsor" (which doesn't make sense), you're securing a deal that will deliver better returns as the sponsor is (hopefully) only paying a standalone price for the target, but will capture 100% of the synergies, hence better returns.

An example you can cite in the MM PE space is Novolex's acquisition of Duro Bag in mid 2014, followed by its acquisition of Packaging Dynamics towards the end of 2014 (see http://www.wppartners.com/overview/novolex-to-acqu...).

An interesting part of that deal is that the sponsor (Wind Point Partners) put equity into the LBO of Duro Bag in the first deal, but the second deal was entirely financed by debt. The merger of Novolex + Duro Bag + Packaging Dynamics meant that the earnings of the combined company could support the total level of debt that resulted from this deal.

Novolex has #1 market share in plastic bags in the US, while Duro Bag was #1 in paper bags. From the sponsor's perspective, synergies in being able to cross sell to a broader base of clients. From Novolex perspective, entering the paper bag market provided a hedge against the risk of further bans on plastic bags (as seen in California). The later Packaging Dynamics deal was mainly plastic packaging and broadened out Novolex's client base (more cross sell) and also allowed it to get access to the market for some of the higher margin specialty packaging products that Packaging Dynamics does.

If you're interviewing for IB, the next logical thing to talk about is why an IB would like to see these deals happen. That said, this is probably value add territory and more than they'd expect from an SA or grad candidate.

First is the M&A advisory fees and debt underwriting fees on each acquisition LBO.

The second thing to point out is that, assuming the fund is ~4-5 years into its life and needs to start returning profits to LPs around years 7-8, the sponsor may want to sell or IPO the combined business after ~18-24 months (ie enough time for the synergies to emerge and get reflected in earnings, which benefits the sale/IPO valuation). As an IB working on the acquisition M&A or LBO finance, you'll be well positioned to get a role on the sellside deal eg M&A advisory and staple financing on a sale, IPO ECM underwriting fees and IPO debt refinance role on an IPO.

Thirdly, working on the acquisition deals is good for building a relationship with the sponsor, which should give you access to further deals with the sponsor. You care about this more when the sponsor is successful and has more LP money in its funds, because that means more potential for deals. If the PE sponsor was a small shop with low prospects for getting bigger, not much money under management, then you won't care so much (because prospect of further fees from the relationship is lower) and you may want to prioritise those PE funds that are bigger.

Because, at the end of the day, your job in IB is chasing fees.

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Jan 16, 2015

As examples of synergies between separate portfolio companies (ie where the companies aren't merged), there are some PE funds who do look for this. I've worked with at least one PE GP that has a largely consumer retail focus and looks for ways to create value through synergies with other portfolio companies eg investing into a retail supply chain company, then getting all the retail companies in its portfolio to use the newly acquired supply chain company.

Jan 26, 2015

You can raise the Glencore & Rio Tinto. There have been a lot of media coverage on that speculative merger and might give you some insights.

Jan 26, 2015

Got asked OP's question in a superday (EB) this past Friday and said Glencore & Rio Tinto. Got the offer so can recommend this answer. Make sure you know each company well and the details behind Glencore's recent offer and Rio's rejection.

Jan 26, 2015

Pitching 2 business because there are synergies / economies of scale is fine. Pitching 2 businesses with a clear strategic rationale is better. If i want to hear about an LBO i'll ask you technical / specific questions. Also you probably dont know the #'s as well as the banker and dont want to spend your time defending your numeric assumptions. Keep it top level, and demonstrate ability to think critically

Jan 26, 2015

couple ideas:

PFE spins off viagra, merges with lifealert

SWHC & RGR merge with SCI (I'm sure very few will get this)

cricket & boost mobile

jenny craig & victoria's secret

cash money records & death row

ok I'm done

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Jan 26, 2015
thebrofessor:

cricket & boost mobile

"Where you at?"

I'm too drunk to taste this chicken -Late great Col. Sanders

Jan 26, 2015

http://www.comedycentral.com/videos/index.jhtml?vi...
FUBU and KFC.

After that I think a logical move would be to buy Cadillac from GM.

Jan 26, 2015

Does M&A actually help companies? I know studies say 1/2 of M&A fails but that can be due to a variety of factors, but over all I hear that culture clashes, layoffs, and difficulties transitioning the business often hurt the companies at the end. Obviously distressed situations or things like Google buying out tiny tech companies benefit but besides that do large mergers and the like actually help clients/society as a whole or just the bankers/consultants involved?

Jan 26, 2015

I think the best way to answer this question would be to look at two companies that don't offer the exact same thing but have an opportunity to revolutionize an industry through a merger.

A good example of that would be something like Valve (because of the steam engine) merging with a company like Activision.

Jan 26, 2015

All this is very well. However, I thought it would be better if a Monkey posted an actual idea and then explained his motivation for doing so. Fellow Monkeys could then dismantle it and have a discussion.

Jan 26, 2015
Clarkey:

All this is very well. However, I thought it would be better if a Monkey posted an actual idea and then explained his motivation for doing so. Fellow Monkeys could then dismantle it and have a discussion.

Lots of opportunity for cross selling with a merged KFC and FUBU entity.

Cost cutting too if you sold both out of the same drive through.

Jan 26, 2015
Clarkey:

All this is very well. However, I thought it would be better if a Monkey posted an actual idea and then explained his motivation for doing so. Fellow Monkeys could then dismantle it and have a discussion.

Clearly you don't know anything about the gaming industry or you would realize that the above merger is self explanatory.

Jan 26, 2015

Dell and hp

Jan 26, 2015

UNICEF and Smith & Wesson

regional airlines

Jan 26, 2015

Google/Akamai?

Jan 26, 2015

Google and Walmart......to rule the world.

Jan 26, 2015

WWF & WWE - man vs panda cage match

Jan 26, 2015

UFC and PETA because it would be the most entertaining thing I could ever hope to watch

If I had asked people what they wanted, they would have said faster horses - Henry Ford

Jan 26, 2015

I think Florida Marlins should acquire Yankees.

Jan 26, 2015

House Targaryen should definitely merge with the House Tyrell. The Tyrells have enough cash on their balance sheet that they can be the acquirer. The Unsullied and the Reach navy present great strategic synergies.

Best Response
Jan 26, 2015

Wall Street oasis and mergers & inquisitions

    • 3
Jan 26, 2015

Why can't you think of anything?

Here's a little guidance: find a company with a looming patent expiration, then find a smaller biotech company to fill in the anticipated excess production capacity.

Jan 26, 2015

I think Pfizer should merge with Intuitive Surgical. Think of the synergies man! The same hot sales lady can pitch to both medical AND surgical doctors!

(BTW this is a joke in case you can't tell)

Jan 26, 2015
Comment
Jan 26, 2015