Can you walk me through one of your deals?
Sample Outline: So we were hired as a buy side advisor to XYZ Client on the potential acquisition of Company A. Company A is essentially the largest European plastic packaging company in Europe and they essentially make products or specialize in or that provides solutions for the home personal care industrials and healthcare markets. They have around 4 billion in revenue, 15 percent profit margins. They have plants in – they have about 150-plus plants in 29-plus countries and have over 10,000 employees. And on my deal, the specific role that I had was I built the model, I managed comps and precedents and also assisted with a lot of the due diligence requests from the company along with M&A.
So what do you think the sponsor was thinking about as the merits for the deal?
Sample Outline: I think for starters, what ABC Sponsor really found interesting about the deal was that it was a leading franchise with global resin scale. I think they liked the fact that it was a well-invested asset base. And lastly, I think they liked the fact they could – they liked the fact they could acquire the company at very attractive prices.
How did ABC Sponsor think about valuation?
Sample Outline: So with the company, one of the interesting things about this deal was that the company’s stock price was getting pummeled in the stock market due to two things. One was the regulatory issues around a lot of the accounting practices that the company maintained. And secondly was the fact that there’s this whole secular headwind around single-use plastics. And right now, that was kind of the main field that the company operated in.
So how did you think about the risk for ABC Sponsor in this transaction?
Sample Outline: So mainly the risks, I’d say the huge risk that Apollo really focused on was kind of the secular headwind. So when it came to the legal issues and the regulatory issues, that was kind of in the back of their mind, because not many people can really understand what’s going to happen with the jury. So because of that, the focus was kind of the demand for single-use plastics and how Apollo can best position the company for, in order for them to generate the returns they were looking for. So what they really did was they kind of tried to move towards more sustainable packaging, which was one way to curb around the secular headwind.
Would you invest in a business like this?
Sample Outline: So overall, I would say no. The reason I would say no though is because I think generating returns in this environment is already incredibly hard, and I think to invest against a secular headwind like single-use plastics would make our jobs or their jobs just incredibly hard to the point where it would be almost pointless to really invest in this company. For that reason, I don’t think it’s worth investing in this company.
Do you think this was a good deal for ABC Sponsor then, specifically?
Sample Outline: For ABC Sponsor, what they saw was the fact that they had an operating partner who was the CEO of one of their past companies who knew the asset extremely well. So because of that, he was able to articulate the opportunity in front of them and really convince people and rally support for the acquisition of this deal. But if it wasn’t for that inside man who knew the company extremely well and could turn the company around, I think it would be incredibly hard for them to be able to generate return.
Tell me more about the XYZ transaction highlighted on your resume, what were some of the key assumptions that you guys made on your model?
Sample Outline: Starting with top line growth, there’s about 2 to 3 percent, margins around 15 percent and CAPEX as a percent of sale was around 2 to 3 percent. We forecasted EBITDA growth around 500 basis points across a seven-year timespan. Really the underlying assumption or the rationale behind that was there was a lot of cost-saving initiatives that could be implemented with XYZ Transaction that ABC Sponsor was ready and eager to take advantage of. Going into this deal, one thing that Apollo saw was that there was this huge cost savings initiative that could be implemented due to the fact that the way the XYZ Transaction Company grew is that they grew through acquisitions. They started in the UK and as they started to acquire different companies, they would – they would buy a company but they would keep the CEO, they would keep the CFO and they would keep the headquarters of that region. So because of that, they didn’t – they had a lot of integration initiatives that could have been utilized in order to drive costs down. So really the game plan here that ABC Sponsor is getting ready to utilize is they were going to buy the company. They were going to increase margins as ways to generate extra cash to play down debt and really that was the game plan. Um, the business was really – it’s a GDP, GDP-plus company at best, but for the most part, it’s a GDP grow – it’s a GDP-style company. So really the game plan here was increasing margins, getting into the company, increasing margins and really an integration play.
So tell me a little bit more about the, the XYZ market or XYZ Industry
Sample Outline: the begin with, the paper and packaging in general is a pretty big landscape. You have a few large competitors in the market, but it’s a very fragmented industry. You typically have multiples that trade around 10 times and going on kind of, going on in the background within the paper packaging market is that there’s a whole secular headwind around single-use plastics, which has really compressed multiples due to the fact that most investors right now, while they have a lot of assets to deploy, one thing that they’re thinking about in the back of their mind is is a company sustainable enough to kind of weather this whole secular movement or this whole secular trend around the use of plastics.
What was the strategic rationale of the investment / Deal?
Be able to list at least three to five points of the merits of the deal. Have the answer flow in a way that creates a story so you don’t sound like a monkey who can only memorize a confidential information memorandum (“CIM”). Be prepared to have concrete evidence that backs up each point, such as projected growth rates, gross margin percentages, etc.
Discuss the industry outlook and trends.
Know historical, current and projected themes of the industry. Understand the competitors and where they trade in relation to the target company. Recognize how the target company should outperform, underperform, or be neutral with its industry. You might also be asked to opine on industries outside of your work experience. The interview is probably reviewing the industry or company himself and wants to bounce ideas off you. Unfair if you have no experience in the industry, but handle it gracefully.
What were the comps? How did you choose them? What were they trading at?
It’s a routine rookie mistake to not think about this question when you study for your interview since you’re so focused on the target company. You choose comps based on how similar they are to your target company. The similarities are a combination of industry, geography, cash flow characteristics and capital structure. Key ratios are price to earnings (“P/E”), enterprise value to EBITDA (“EV/EBITDA”), debt to equity (“D/E”), debt to capitalization (“D/cap”). Don’t forget important industry multiples like enterprise value/sales (“EV/sales”) for non-profitable companies.
How did you value the deal example?
There are three main methods of market valuation. There is the discounted cash flow (“DCF”) methodology, trading comparable company multiples (“trading comps”), and comparable transactions multiples (“acquisition comps”). For PE, a fourth technique is the LBO valuation, which is a subset of the DCF. You should know how the company was valued by each methodology. At the end of the day, the DCF shows the intrinsic value of a company, but trading and acquisition comps provide the general boundaries of how the market will perceive the investment.
Was it a good deal? Why?
Have a fantastically thoughtful answer to this. Prepare evidence to back up your theory, i.e., the answers to the other questions in this chapter.
How did the investment/deal perform?
If you are an investment banker or consultant, remember to refresh your memory on what happened after you finished your work. Especially if the investment is public, check how its stock performed and whether research reports opine on the deal. Sell-side people usually only focus on getting the deal done and then work on getting the next deal versus evaluating the aftermath. Buy-side people are actually tied to performance and thus monitor investments closely until exit. For people who are already traders in the HF/PE industry, or in other buy-side positions, you need talk about your investment track record; what was the entry and exit price, giving what percentage return over what duration of the investment?
What were the sources and uses of funds (“S&U”)?
This refers to an M&A transaction, and the sources are the financing, like debt, equity, proceeds from targets’ options, and cash. Each deal uses a different mix; be able to explain why this particular mix was used for the deal. Know the names of the different tranches of financing instruments used (such as senior versus mezzanine debt) and the cost (interest rate for debt, exchange ratio for stock) of each. The uses include the price of the asset or equity, transaction costs, purchase of the target’s options, and debt paid off or refinanced. You can apply S&U to a equity or debt offering by discussing the structure and covenants of the financial instrument and the intended purpose of the funds (general corporate
purposes, pay down debt, acquisitions, organic growth, etc.).
What were the credit stats?
For M&A, this is the S&U in multiple form; for an existing company, this is its
current capital structure in multiple form. The relevant numbers are debt,
earnings before interest, depreciation and amortization (“EBITDA”), capital
expenditures (“capex”), interest, and funds from operations (“FFO”). They can
be combined to form various credit statistics such as total debt/EBITDA, senior
debt/EBITDA, EBITDA/interest, (EBITDA – Capex)/interest, FFO/total debt, (FFO
+ interest)/interest. Especially relevant for PE, this is a measure of how a
company can support debt. EBITDA is a proxy for cash flow to debt and equity
holders, where debt holders are first in line. Unlike equity, paying debt holders
is mandatory, so if interest cannot be paid, then the company is in danger of
bankruptcy. Therefore, debt/EBITDA of 6.0x means it would take the company
about six years to pay off the debt if EBITDA stayed constant. The higher the
metrics of amounts owed/cash flow like debt/EBITDA, the higher leverage and
riskier capital structure. Reversely, cash flow/amounts owed metrics like
EBITDA/interest are better when they are higher and cannot dip below 1.0x.
Note that capex is not an income statement expense but is an outgoing cash
flow, so (EBITDA – Capex)/interest is a relevant metric. EBITDA/interest is
usually considered to be minimally safe at 2.0x. PE firms will hound you for this
kind of data.
What were the acquisition multiples?
This refers to price paid/cash flows, giving a benchmark to the value of the transaction. The numerator can be enterprise value or just equity value.
What were the projected returns?
You are usually talking about the internal rate of return (“IRR”), which is the relationship of cash flows received versus the initial investment over a period of time. IRR can be unlevered or levered. Unlevered return is to debt and equity holders and does not incorporate capital structure effects. Levered return is only to the equity holders and should be higher than the unlevered return because of the tax shield of debt.
What was the premium?
If this is a public company that was bought, then this refers to the relationship between the price paid per share versus the market price paid per share at the time of the offer. The offer price in order to induce shareholders to sell their shares. Sometimes they call this a change of control premium. Premiums are usually around 10 to 30 percent, but can be lower or higher. You should be prepared to discuss whether this premium is justified; if you think the price paid is more than the intrinsic value of the firm, obviously you believe the premium was expensive.
Would another financial or strategic buyer have paid more?
If the acquisition is a private sale, you can probably mention players that are more aggressive which may have paid more. Even in a public auction, the seller may go to a buyer with a lower price but a higher certainty of having the transaction complete successfully. If so, understand why a buyer would have paid a higher price. Do they have a lower required return or do they believe they can produce higher cash flows based on operational or financing engineering? Note that the general theory holds that strategic buyers (corporations) can afford to pay more because they may extract additional operational synergies. However, financial players (PE) may be more aggressive in leverage, which can boost returns. The typical acquisition strategies differs between the two types in that a strategic buyer wants to “buy and hold” and the financial buyer wants to “buy low and exit high.”
Why was it an auction/limited auction/private sale/etc.?
Sellers will generally prefer an auction, as it is good to have bidders compete against one another. Buyers prefer a limited auction or private sale because less competition can mean a lower price. The upside to sellers for limited auctions and private sales is that a serious bidder may feel more comfortable with this process and increase certainty.
Walk me through the model.
A model in Excel is built to calculate the various components of the deal: return, financing structure, projected cash flows, statistics, operating scenarios, etc. Particularly, you should be able to walk through the line items before cash flow. Also, know how the cash flows change post transaction which can include financing structure effects, accounting changes that impact cash taxes, etc. The objective of a model is to calculate cash flows and returns; walking through the model indicates you understand the work that got you to the answer.
Talk about three to five positive aspects of the deal. Talk about three to five negative aspects of the deal.
Mostly focus on the strategic merits versus risks of the deal but you can mention the personal side like a good team, learning experience, or client exposure if you’d like.
What was your role in this deal?
Ideally, you are a candidate that goes above and beyond your title. If you are an investment banking analyst, hopefully you can talk about your creation of the model. As a vice president, give good examples as to how you managed the dayto-day details while summarizing the big picture to your superiors.
What are the drivers of growth?
Growth can be operationally organic (from inside), acquisition based or financial (recapitalizing). Think about a pharmaceutical company. It relies on various drugs to be sold to consumers. The bulk of cash flows result when a patent is obtained and the drug is popular. Prices are higher at this time because the pharma company has a monopoly on this drug. However, patents expire, so in order to maintain growth, new drugs and patents must be developed. This can be accomplished by internal research and development, or through buying another company that has promising drugs or patents. Understanding the drug pipeline illustrates the level of growth. For instance, sale of drugs for the elderly should increase in volume due to the aging baby boomers.
What were the margins? What is the growth rate of revenue? What is the growth rate of EBITDA? What is the growth rate of net income? What is their market share? Who is the customer base? Who are the suppliers?
Interviewers can ask many more of these questions. You must fully grasp the business model of the company. Study the historical and projected financials.
What are the fixed versus variable costs? How much maintenance versus growth capex are there?
These questions are asked to test the resilience of the company to downturns. Fixed costs and maintenance capex must be paid, regardless of the current profit. Variable costs are only paid if a new product is made, and growth capex can be canceled. High fixed costs and maintenance costs create riskier operating incomes.
What other companies could the acquirer have bought?
Basically, even if this was a good investment, was there a better investment out there? A good investor is a discerning, selective one. PEs have a limited amount of money to spend and want to maximize return. Describe the qualities that would have increased growth or decreased risk at these other companies.