Investment Banking Career Advice: Can You Answer the 4 Toughest M&A Interview Questions?

Investment banking interviews are notoriously difficult, but there are ways to make sure you don't leave the room with your tail between your legs.
By Patrick Curtis ,

Investment banking interviews are notoriously difficult. However, there are ways you can prepare to make sure you don't leave the room with your tail between your legs.  The best way to ensure you make a good impression is to repeatedly practice delivering your personal story.  In particular, be ready for standard fit questions such as "why banking?" and "why this bank/group?"

Although acing the fit questions are important, you should also make sure to polish up on your technical financial knowledge so that you can impress even the most difficult interviewer.  Personally, I have a standard set of M&A investment banking interview questions I like to ask. In my career, I've only had two analyst / associate candidates answer all four levels correctly without coaching. Most people can get Level 1 and sometimes Level 2. Fewer get Level 3 or 4, even with some generous coaching.

Here are the 4 toughest M&A Interview Questions. Can you answer all four levels?

Company A acquires Company B. Assume all numbers below are inclusive of premium and synergies.

Level 1
Company A has PE of 10 and company B has PE of 8.  In an equity-swap deal, is the transaction accretive or dilutive?

Level 2
This is to break the people who read generic interview guides and quote the "cheaper earnings" answer / shortcut
Company A uses debt which has an after tax kd of 5% to acquire B.
A. Is the deal still (accretive / dilutive) like in Level 1 question? More or less?
B. What after tax kd would make the deal approximately break even from an accretion perspective?

Level 3
This question requires a framework. If you blurt out a number: A. I bet I know what answer you're going to blurt out and it's wrong and B. you need to show me you put more thought into it regardless: Right number with no backup is the wrong number.
Assume the companies are the same size (read: same EV) and other reasonable simplifying assumptions.
A. Without doing any math, what are some reasonable boundaries for the PE ratio of the PF entity?
B. How accretive is the deal in Level 1 as a %? Is your PF PE ratio within the bounds you expected?

Level 4
If you have the framework for Level 3, chances are you can probably get this one too
Assume company A is twice the size of company B (read: EV A = EV B x 2).
A. Without doing any math is the deal more accretive or less accretive? What are the PE bounds in this case?
B. Now do the math and tell me exactly how accretive it is. Does your answer make sense?

Top Answer from the Community

1. Accretive for A. Say A is 8 shares of $10 (earnings $8), B is 10 shares of $8 (earnings $10). A issues 8 more shares, now has 16 shares of $10 with earnings of $18. P/E has gone from $10 to 8.8/8.9

2. Accretive for A. You're borrowing $80 at 5%, or a cost of $4 to add earnings of $10. It would break even at 12.5% (1/(P/E of B)).

3. It should be less than 9; you can't just average the P/Es, think about it as averaging the earnings and what that would mean if the market cap was the same (market cap of $80 and earnings of $9 = P/E of less (This is only a guess after having done the math; but I think there's some truth in not being able to add/average P/Es, even of same-size companies).

4. It will be less Accretive because the company that's making it Accretive has a lower weight.
Say A has earnings of $16 and is $16 shares of 10; they have to issue 8 more shares to make the purchase and now have a market cap of $240 and earnings of $26; $234 would be P/E of 9 but it's higher, so ~9.25


Answer to these questions plus 100+ more of the Toughest Investment Banking Interview Questions Are Right Here

Patrick Curtis is the CEO and Founder of WallStreetOasis.com, an online community focused on careers in finance.

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