Mergers & Acquisitions

4 calculators on this page

Reach for this firstThe exchange ratio, and who ends up owning what What the synergies have to be worth

SpecialisedWhat an earn-out actually pays The break fee, both ways

This deskWhat it does, who is in the room, and how the transactions relate.

The desk at a glance

Mergers and acquisitions is the business of moving ownership of a company from one set of hands to another. Everything else on this desk — the auctions, the offers, the defences, the separations — is a variation on that one sentence, and the variations exist because the seller, the buyer and the law each impose different conditions on how it may be done.

Two things make this desk unlike every market on the other half of this site. There is no continuous price: a company is sold once, to one buyer, at a number two boards negotiated, and the next sale may be years away and at a completely different multiple. And there is no anonymity: both sides know exactly who they are dealing with, which is why so much of the work is about information — who knows what, when they are allowed to know it, and what happens the moment it leaks.

The consequence a newcomer feels first is that time is the risk. Between the day a deal is agreed and the day it completes, months pass in which a regulator, a court, a shareholder vote or the buyer's own financing can end it. The gap between the offer price and where the target's shares actually trade is the market's daily estimate of exactly that, and it is readable by anybody.

Who does what

• The seller's adviser runs the process: who is approached, in what order, on what timetable, and how the competitive tension is kept alive. Most of the price is made here rather than in the model — see the sell-side auction.
• The buyer's adviser does the opposite job: finding the deal before it is a process, and, once inside one, arguing that this buyer is worth choosing on something other than price.
• Lawyers on both sides write the conditions. Which approvals are needed, who bears the risk that one is refused, and what either side may walk away from are all contract terms, and they are worth more than a percentage point of price.
• The financing banks decide the ceiling for any buyer paying with borrowed money — see leveraged finance, where a bid is a financing package with a price attached.
• The regulators — competition authorities, foreign-investment screens, sector supervisors — hold the only veto nobody in the room can negotiate away.
• The arbitrage funds arrive after the announcement, buy the shares from holders who want certainty, and become the register that votes.

What decides whether this desk is busy

Six mechanisms, each with the direction it pushes in and the thing to watch. None of them is a forecast, and none is a number that goes out of date.

The calendar this business keeps

Every desk has a rhythm its regulars plan around and a newcomer discovers by being surprised by it.

How this desk reaches the rest of the site

The deals and the instruments are one subject. These are the corridors — each one a mechanism, not a resemblance.

How the work is actually doneWhat the client pays for, the documents in order, and the arithmetic.

What the client is actually paying for

Advisory fees on this desk are structured rather than quoted, and the structure is more informative than any number. A typical arrangement has three parts, and each exists to solve a specific conflict:

• A retainer, paid whether or not anything happens. Small, and its job is to make the adviser's time real rather than free — an adviser paid nothing until completion has an interest in completion rather than in the right answer.
• An announcement fee, paid when the deal is signed. It recognises that most of the work is finished at signing, and it protects the adviser against a deal that dies at a regulator months later through nobody's fault.
• A completion fee, much the largest, paid only if the transaction closes. Usually a percentage of the value of the deal, sometimes with a step-up above a threshold price so that the adviser is paid more for getting more.

The step-up is the interesting part, and it is a conflict rather than a solution. A percentage of value pays an adviser more for a bigger deal, which is not the same as a better one — and the seller's adviser is paid nothing at all if the board decides the standalone plan is better. Nothing here is a comment on any firm's conduct; the point is structural, it is disclosed in takeover documents, and it is one of the first things to look for in one.

A fairness opinion is often paid for separately and flat, for exactly this reason: an opinion on whether a price is fair should not be delivered by somebody whose fee depends on the answer.

Which blocker decides across this desk

• Price4 of 15The two sides cannot agree what it is worth.Decides: Hostile takeover, Minority stake, Sell-side auction, Tender offer. Matters on 8 more.
• Financing1 of 15The money is not there, or its cost moved under the deal.Decides: Take-private. Matters on 7 more.
• Approval8 of 15A regulator, a court, a board or a shareholder vote says no.Decides: Activist campaign, Joint venture, Merger of equals, Recommended offer, Scheme of arrangement, Spin-off, Squeeze-out, Take-private. Matters on 3 more.
• Diligence3 of 15What was found when the buyer actually looked.Decides: Carve-out, Private share purchase, Sell-side auction. Matters on 4 more.
• Execution9 of 15Documents, disclosure, timetable, and the people running it.Decides: Activist campaign, Asset purchase, Carve-out, Hostile takeover, Joint venture, Merger of equals, Scheme of arrangement, Spin-off, Tender offer. Matters on 6 more.

The documents, in the order they appear

• The non-disclosure agreement — before anything else. It usually also contains a standstill: the recipient may not buy shares or launch a bid outside the process it has just been let into.
• The teaser and the information memorandum — one page without the company's name, then a hundred pages with it. See the playbook on reading one.
• The process letter — the seller's rules: what a bid must contain, by when, and what happens to bids that do not comply.
• The non-binding indication, then the binding offer — the second comes with a mark-up of the seller's draft contract, which is where the real negotiation is.
• The sale and purchase agreement — price, conditions, warranties, indemnities and the long stop date. The playbook takes it apart clause by clause.
• The announcement — for a public company, a regulated document with rules about what it must say and when it may be said.
• The scheme document or offer document — sent to shareholders, containing the recommendation, the valuation analyses relied on and the irrevocable undertakings already given.
• The completion accounts — weeks after closing, adjusting the price for the cash, debt and working capital actually there on the day.

Run the numbers

Interactive: the exchange ratio, and who ends up owning whatMedium

Open this calculator on its own page →

Fix a premium on the target's share price and the ratio follows. So does the split of the combined company, which is the number both boards are really arguing about.

Target share price Acquirer share price Premium offered % Target shares (m) Acquirer shares (m)

Offer value per target share

—

Exchange ratio

—

New shares issued

—

Target holders own

—

Acquirer holders keep

—

Equity consideration

—

Reading

—

A fixed ratio, struck at today's prices. Every day until completion the implied premium moves with the acquirer's shares, and nothing in the agreement moves with it. Information and education only. Not advice, not a valuation, and not a quote for anything.

Interactive: what the synergies have to be worthMedium

Open this calculator on its own page →

The premium is paid once, at closing. The synergies arrive over years, are taxed, and cost something to achieve. This is the test the buyer's own board paper has to pass.

Target market value ($m) Premium % Annual pre-tax synergies ($m) Tax rate % Discount rate % One-off cost to achieve ($m)

Premium paid

—

Present value of the synergies

—

Pre-tax synergies needed to break even

—

Coverage of premium plus cost

—

Net to the buyer's holders

—

Reading

—

A perpetuity on a flat synergy number, which is generous: it assumes they arrive in full, on time, and never decay. Information and education only. Not advice, not a valuation, and not a quote for anything.

Interactive: what an earn-out actually paysMedium

Open this calculator on its own page →

A deferred payment against a target. The shape decides everything — a cliff pays nothing one percent short, a linear one pays almost all of it.

Target EBITDA ($m) Achieved EBITDA ($m) Maximum earn-out ($m) ShapeCliff — all or nothingLinear above a floor Floor, % of target Discount rate % Years to payment

Target achieved

—

Earn-out earned

—

Present value at completion

—

Not earned

—

Sensitivity

—

Reading

—

Straight arithmetic on one measurement date. It says nothing about the definition of EBITDA in the agreement, which is where the actual dispute lives. Information and education only. Not advice, not a valuation, and not a quote for anything.

Interactive: the break fee, both waysEasy

Open this calculator on its own page →

What a broken deal costs each side, and whether the fee is a deterrent or a rounding error against the work already done.

Target equity value ($m) Break fee % Reverse break fee % Months from signing to long stop Buyer's own deal costs ($m)

Payable by the target

—

Payable by the buyer

—

Buyer's net recovery

—

Deal cost per month

—

Asymmetry

—

Reading

—

Fee levels are a matter of contract and, in several jurisdictions, of a takeover code. Nothing here states what any code permits. Information and education only. Not advice, not a valuation, and not a quote for anything.

Go deeper, and practiseLonger pieces, what an interview asks here, and a page to print.

Go deeper

How a deal dies here

Rarely in the dramatic way. The ordinary endings, in roughly descending order of frequency:

• The price gap never closes. The seller's number came from what it paid or what it needs; the buyer's came from what it can fund at a return. Neither is wrong and no analysis reconciles them.
• Diligence finds something. Not fraud — a customer contract that ends, a pension deficit measured properly, environmental liability, a tax position that will not survive review.
• The financing moves. A bid built on debt priced in one quarter is not fundable in the next, and the bidder withdraws rather than fund it with equity.
• The regulator takes too long, or asks for too much. Remedies that remove the reason for the deal are a refusal by another name.
• Shareholders say no — the target's, because the price is too low, or increasingly the buyer's, because the price is too high.
• Something leaks. A confidential process that becomes public before it is ready either accelerates into a bad outcome or stops entirely.

Those five reasons are the subject of what kills a deal, which reads the same table the other way round — by blocker rather than by transaction.

Test yourself: the M&A desk

Quick questions on this desk — four options each, checked entirely on your device, nothing stored or sent. Wrong answers come with explanations, and the deep dives above hold every one of them. For education only.

What an interview asks here

Almost every M&A question is checking one thing: do you know that a transaction is a process with conditions, rather than a valuation with a signature at the end.

Try each one out loud before you open it. What is underneath is the shape of a complete answer, not a script — somebody who can produce those parts in their own words can also answer the four variations that follow, and somebody who has memorised a paragraph can answer one.

Q1Walk me through what happens between a seller deciding to sell and the money arriving.

What it is checking. The opening question on this desk, and it is testing whether you know there are two halves — a process to reach a signature, and a much longer period of conditions after it.

A complete answer contains:

• Preparation: the seller decides what is being sold, assembles the information, and picks the route — a broad auction, a targeted approach, or a bilateral negotiation.
• Marketing: approaches, a teaser and a non-disclosure agreement, then an information memorandum and non-binding indications of interest.
• Second round: a data room, management meetings, and a draft sale agreement the bidders mark up — the mark-up is part of the bid.
• Signing: terms agreed, and from here the conditions run — competition clearance, foreign investment screening, sometimes a shareholder vote.
• Closing: the conditions are satisfied, money moves, ownership transfers. Between signing and closing, six to twelve months is ordinary.
• The part worth saying out loud: most of the price is made in the second stage, by keeping more than one bidder credible.

Read it properly: Sell-side auction · Recommended offer

Q2A target trades at 40 and the offer is 50. Why is the share price 48 rather than 50?

What it is checking. Whether you read a spread as a discount or as a probability. It is the fastest way to tell whether somebody has actually looked at a live deal.

A complete answer contains:

• It is not a view that the company is worth less than the offer. It is the market's estimate that the deal might not complete.
• Two things are in it: the probability of completion, and the time value of money over however long the conditions take.
• So the same completion probability produces a wider spread when the long stop date is a year out than when it is a month out.
• It moves on regulatory filings rather than on business news — a second request or a clearance is what repositions it.
• If it is a share deal, the target's price tracks the ratio times the acquirer's price, so the gap has to be measured against that rather than against a fixed number.

Read it properly: Recommended offer · Exchange ratio

Q3The buyer is paying a 30% premium. What has to be true for that to make sense?

What it is checking. Whether you can turn a premium into an annual number, and whether you know the number has to survive tax and the cost of achieving it.

A complete answer contains:

• The premium is paid once, at closing, in cash or in shares. The synergies arrive over years, are taxed, and cost something up front to achieve.
• So the test is: present value of after-tax synergies, minus the cost to achieve, against the premium paid.
• As a rough annual figure: premium times the discount rate, divided by one minus the tax rate, is what has to be delivered every year in perpetuity just to break even.
• Cost synergies are more credible than revenue synergies, because you can name the line they come out of.
• And the honest caveat: if the target's price already reflects an expectation of a bid, part of the premium is being paid for something already in the price.

Read it properly: Synergies · The synergy calculator

Q4Two offers, same price. One is cash, one is shares. Which should the seller prefer?

What it is checking. Whether you will give an answer that depends on the seller rather than a rule. There is no correct answer, and saying so correctly is the answer.

A complete answer contains:

• Cash fixes what the seller receives. Shares fix a ratio, so what they receive moves with the buyer's price right up to closing and afterwards.
• So it depends on whether the seller wants out, or wants to participate in the combined company.
• Tax usually cuts the other way: cash is generally a disposal and taxable; a share exchange is frequently a rollover, jurisdiction permitting.
• Certainty differs too: a share deal normally needs the buyer's shareholders to approve the issue, which is a condition a cash deal may not have.
• The structural answer: a collar bounds the ratio's movement, and whether one is on the table tells you which side expects the buyer's price to move.

Read it properly: Cash vs. shares · Exchange ratio

Q5What actually kills deals?

What it is checking. Whether your answer is a list of dramatic possibilities or a ranked one. The interviewer wants to hear that execution and price break more deals than regulators do.

A complete answer contains:

• Price, first and most often: the two sides never converge, or a bidder's view changes during diligence.
• Execution: the process runs out of momentum, a key person leaves, the market moves, or the seller's board changes its mind.
• Approval: competition clearance, foreign investment screening, or a sector regulator. Slower and more visible, but a smaller share than people expect.
• Financing: decisive where the transaction is itself a financing — a buyout, a bond-funded purchase — and largely absent elsewhere.
• Diligence: something is found that changes the price or the structure rather than ending it outright.
• The one worth naming: a rule that did not exist when the deal was signed. No condition protects against a change in law, because changes in law are normally carved out.

Read it properly: What kills a deal · A deal ended by a rule change

Q6Why would a buyer prefer to buy the assets rather than the shares?

What it is checking. A structuring question, and it separates people who have read a sale agreement from people who have read about one.

A complete answer contains:

• Buying the shares means acquiring the legal entity and everything inside it, including liabilities nobody has found yet.
• Buying the assets means acquiring only what the schedule names — so historic tax, environmental and employment exposure stays with the seller.
• The cost is complexity: every contract may need the counterparty's consent, and licences frequently have to be reapplied for.
• Tax normally pushes the two sides in opposite directions — a buyer can often depreciate an allocated asset price, and a seller often has a participation exemption on a share sale.
• So the structure is usually decided by tax and then priced, rather than argued about on principle.

Read it properly: Asset deal vs. share deal · Reading the agreement

Q7The acquirer's shares fell 6% on announcement. What do you make of that?

What it is checking. Whether you can separate a mechanical flow from a judgement. Most candidates give only the second.

A complete answer contains:

• If it is a share deal, merger arbitrage funds sell the acquirer from the first minutes, in the ratio's proportion. That flow is automatic and roughly the size of the deal.
• Separately, the premium is a transfer to the target's holders that has to be earned back, and the market may be doubting the synergy case.
• And there is a signalling reading: a buyer paying in its own shares is handing over a share of the outcome, which some investors price.
• What it is not is a verdict on the target — the target's shares are up, and those are not two opinions about the same thing.
• Day-one moves are a poor predictor of what an acquisition eventually delivers, because the thing being judged has not happened yet.

Read it properly: Why the buyer's price falls · Accretion and dilution

Q8What is a material adverse change clause actually worth?

What it is checking. A conditions question. The honest answer is 'less than it sounds', and knowing why is the point.

A complete answer contains:

• It lets a buyer walk away if something sufficiently bad happens between signing and closing.
• Courts in the main deal jurisdictions have read it narrowly and against the buyer for decades — the bar is durability and magnitude, not a bad quarter.
• Industry-wide effects are normally carved out, on the logic that the buyer bought an industry too.
• Changes in law are usually carved out as well, which is why a regulatory shift can end a deal's rationale without triggering the clause.
• So in practice it is negotiating leverage to reprice more often than it is an exit — and its real function is to bring both sides back to the table.

Read it properly: Recommended offer · Reading the agreement

Do these against a clock → — one at a time, ninety seconds each, answer before you look.

Whose questions these are. Every question on this page was written for this publication. None is taken from anybody else’s question bank, and none is a claim about what any named firm asks — that is neither verifiable from here nor ours to assert. They are our own reading of which mechanism a question of this kind is testing. Information and education only.

How the transactions fit together

Three questions separate everything on this desk: what is being bought, whose agreement is needed, and what the seller keeps. A recommended offer, a hostile takeover and a tender offer are the same purchase at three different levels of agreement — board and shareholders, shareholders alone, or shareholders one at a time. A scheme of arrangement reaches the same end by a different road: a court sanctions it and it binds everybody at once, which is why it either works completely or not at all. A squeeze-out is what finishes the job when a handful of holders never answered.

What is bought decides which liabilities travel. A share purchase buys the company and everything attached to it; an asset purchase buys the business and leaves the history behind, which is why it is slower and needs every contract moved by hand. On the seller's side the same separation appears twice: a carve-out sells a division to somebody else, a spin-off hands it to the existing shareholders and sells nothing at all.

Two of these are not transactions but the conditions around one. A sell-side auction is a process for manufacturing a price where no market quotes one, and an activist campaign is the pressure that puts a company into that process in the first place. And three stop short of control: a minority stake and a joint venture do with a contract what a shareholding does not give them, while a merger of equals pays no premium, so the negotiation moves off price entirely and onto who governs afterwards. A take-private is the one that belongs to two desks at once: the offer is an M&A offer and the money behind it is a leveraged finance structure.

Concepts to master

• Enterprise value is not equity value, and neither is the offer price. Debt, cash, pensions, leases and minorities sit between them, and most valuation errors are a comparison of one with another — see discounted cash flow.
• Consideration is a signal. Cash says the buyer is certain; paper says the buyer would like the seller to share the risk, and thinks its own shares are worth using. See the exchange ratio.
• Conditionality is priced. Every approval a deal needs is a probability and a delay, and both are visible in the spread between the offer and the market price.
• Control has a value of its own, separate from the business: the ability to change the strategy, the capital structure and the management. It is why a minority stake trades below its arithmetic share.
• Synergies are a forecast made by the party that needs them to be true — and the buyer's shareholders pay for them at announcement, whether or not they arrive. See synergies.

Analysis

⬇ The whole desk on one printable page

Who does this: Mergers & Acquisitions is a sell-side seat in Investment Banking, alongside Equity Capital Markets, Debt Capital Markets, Leveraged Finance, Restructuring, Structured Finance, Valuation & Deal Analysis. See the industry map.