M And A Valuation Interview Drill

I am an MBA candidate in Canada with operations experience, and I am targeting a middle-market advisory role in investment banking. Can we do an interviewer-led case on a recent acquisition and focus on the M&A process and valuation? I want to be pushed on accretion and dilution, comparable companies, and precedent transactions, and I would like my answers reviewed for technical depth and clarity.

Sure. First, the buyer identifies the target based on strategic fit, financial profile, and potential synergies. The process usually starts with outreach and signing an NDA, then management presentations, a teaser or CIM review, and preliminary valuation work. After that, the buyer submits an indication of interest, does deeper diligence, and negotiates a term sheet or LOI. If both sides agree, final documentation is negotiated, financing is arranged if needed, regulatory approvals are obtained, and the deal closes. From a valuation perspective, I would use comparable companies and precedent transactions to establish a market range, then build a DCF if there is enough visibility on cash flows. Accretion or dilution would tell me whether the deal improves or hurts the buyer's earnings per share after accounting for purchase price, financing, and synergies.

Accretion or dilution depends on whether the buyer is effectively acquiring earnings at a lower multiple than its own earnings multiple, but the real outcome also depends on financing costs, synergies, and amortization of any intangibles from purchase accounting. In a cash deal funded with debt, interest expense reduces net income, so even if the target is cheaper on an EBITDA basis, the after-tax cost of debt can make the deal dilutive. If there are cost synergies, those can improve the result by increasing combined earnings. A lower target EBITDA multiple does not automatically mean the deal is accretive. EBITDA is before capital structure, taxes, and purchase accounting effects. You have to convert to EPS impact, so if the buyer uses expensive debt, overpays, or has significant amortization of intangibles, the deal could still be dilutive despite the target trading at 8.0x versus the buyer at 12.0x.

Precedent transaction multiples are often higher because they include a control premium. Buyers pay more to gain control, capture synergies, or outbid competitors, so those deals reflect strategic value rather than just minority market pricing. Trading comparables reflect public market valuations at a point in time, usually without control premium. For a seller, I would usually lean on precedent transactions more heavily when setting expectations for an M&A sale, because the seller is giving up control and should care about what acquirers have historically paid for similar assets. That said, I would still use trading comps as a sanity check because precedent deals can be skewed by unique synergies, market cycles, or special situations. Ideally, I would triangulate both and explain the range clearly.

To justify 11x, I would point to specific deal attributes that support a premium: a larger growth profile, stronger margins, recurring revenue, high strategic value, or meaningful synergies for the buyer. I would also note whether the buyer universe is competitive and whether there are prior transactions involving control premiums in the same sector. If the target has stronger quality of earnings than public peers, that can also support the higher end of the range. I would back off if the target lacks scale, has customer concentration, has weak conversion of EBITDA to cash flow, or if recent market conditions have compressed multiples. If the transaction set includes very few relevant deals, I would not overfit to a high number. One flaw in comparable companies is that a target with thin public disclosure may have operational differences that comps do not capture, such as uneven working capital, one-time customer losses, or segment mix issues. Public comps can look similar on revenue and EBITDA, but if the target has weaker quality of earnings or more volatile operations, the trading multiple may overstate its value.