How to answer "walk me through a deal you have followed"

What is this question really testing?

The deal question checks whether your interest in banking goes past the job title. Anyone can memorize technicals; following a real deal means you read about it, thought about why it happened, and can talk about price and structure like someone who will work on these. It also tests whether you can connect the technicals (multiples, accretion, financing) to a real situation.

The interviewer will push on whatever you say. If you quote a multiple, expect "is that expensive?" If you mention synergies, expect "do you believe them?" So the deal you pick should be one you can go two or three questions deep on.

How do you pick the right deal?

Choose a deal that is announced and public, recent enough that the interviewer will recognize it, and simple enough to explain in two minutes. A deal in the industry of the group you want is a bonus. Avoid the single most talked about deal of the year, because everyone picks it and the interviewer may know it better than you.

• Announced within the last year or so, so it shows you follow the market now.
• Has a press release with a price, and ideally a merger proxy or an investor presentation with more detail.
• Mid sized and plain: one company buying another for cash, stock, or both.
• Not one the firm you are interviewing with advised on, unless you know it cold. They may have been in the room.
• Have a second deal ready in case the interviewer says they want something else, such as a private equity buyout.

What structure should you use?

Six beats, in this order. It mirrors how a banker would describe a deal to a colleague, and it gives the interviewer natural places to jump in.

1. The headline: buyer, target, what each does, announced price.
2. The valuation: equity value, enterprise value, and the implied multiple, compared with how similar companies trade.
3. The structure: cash, stock, or a mix, and how the cash is financed.
4. The logic: why the buyer wants this, and the synergies it claims.
5. The risks: regulatory review, integration, the price paid, the financing.
6. Your view: whether you think it was a good deal, and the one thing that will decide it.

What does a full answer sound like on a worked example?

Here is the whole walkthrough on a hypothetical deal, so the numbers can be checked end to end. Both companies are invented. In an interview, use a real deal and the numbers from its press release.

Setup: Acme Foods, a public packaged food company, agrees to buy Brightline Snacks, a public maker of better for you snacks, for $40 per share in cash and stock. Brightline's undisturbed share price was $32. It has 50 million shares, $400 million of net debt, $200 million of EBITDA, and $120 million of net income. Acme trades at 20 times earnings. Assume a 25 percent tax rate and that new debt costs 6 percent before tax.

"Acme Foods agreed to buy Brightline Snacks for $40 a share, a 25 percent premium to where Brightline traded before the news. That is a $2.0 billion equity value, and with $400 million of net debt, about $2.4 billion of enterprise value, or 12 times Brightline's EBITDA. Acme is paying 60 percent in cash, funded with new debt, and 40 percent in its own stock. The logic is that Acme's core brands are growing slowly and Brightline gives it a faster growing category it can push through Acme's distribution. Acme says it expects $50 million a year of cost synergies. At a 10 times multiple those are worth about $500 million, more than the roughly $400 million premium Acme is paying, so on paper the synergies justify the price. The risks are that the synergies take longer than promised, that Brightline's growth slows once it is inside a big company, and that the new debt limits Acme's flexibility. My view is that it is a fair price if the distribution story works, and the thing I would watch is Brightline's growth rate in the first year after closing."

1. Equity value: $40 times 50 million shares is $2.0 billion.
2. Premium: ($40 minus $32) divided by $32 is 25 percent; in dollars, $8 times 50 million shares is $400 million.
3. Enterprise value: $2.0 billion equity plus $400 million net debt is $2.4 billion.
4. Multiple: $2.4 billion divided by $200 million EBITDA is 12.0 times.
5. Synergy value: $50 million a year at an assumed 10 times multiple is about $500 million, against a $400 million premium.
6. Accretion check on the cash part: Acme pays $1.2 billion (60 percent of $2.0 billion) with debt at 6 percent, or 4.5 percent after tax, while Brightline earns $120 million on a $2.0 billion price, a 6 percent earnings yield. The target's yield beats the after tax cost of debt.
7. Accretion check on the stock part: Acme's 20 times P/E is a 5 percent earnings yield, also below the target's 6 percent, so the stock portion is accretive too. Before synergies, deal fees, and new intangible amortization, the deal is accretive.

What follow ups should you expect?

The interviewer is looking for whether you can reason, not whether you know every fact. Have short answers ready for these, and if you get one you cannot answer, say what you would check rather than guessing.

The live questions below are the markets and deals questions from the bank. Drill them with your chosen deal in mind.

• Is 12 times EBITDA expensive for this kind of company? Compare with how peers trade and with similar past deals.
• Why pay partly in stock? It preserves the buyer's balance sheet and shares the risk with the target's holders.
• Who else could have bought it? Another strategic buyer, or a private equity firm, and why each might pay more or less.
• Would you rather own the buyer's or the target's stock today? A real opinion, with a reason.
• What would make the deal fail to close? Antitrust review, a shareholder vote, financing conditions.

Questions students ask

Where do I find deal details?

The press release from the buyer or target, the investor presentation usually posted with it, and for public targets the merger proxy filed with the SEC, which has a background section and the advisors' valuation work.

Can I use a private equity buyout?

Yes, especially for a PE or leveraged finance group. Walk it the same way, but the structure beat becomes how much debt was used and the logic beat becomes how the fund expects to make its return.

What if I get the multiple slightly wrong?

Round numbers are fine if they are close and you say they are approximate. A wildly wrong number hurts more than leaving it out, so check it the night before.

How many deals should I prepare?

Two: one strategic acquisition and one in the industry or product you are interviewing for, or a buyout if PE is likely to come up. Know each well enough to answer three follow ups.

Should I have an opinion even as a sophomore?

Yes. The interviewer is not grading whether you are right. They want to hear that you can take a position, give a reason, and change your mind when given a good argument.