IB interviewers love this question. Acquirer at 12x P/E. Target at 15x P/E. All-stock deal. The deal is accretive to the acquirer. Why? ๐ก Save this to nail your interview. The textbook rule says the acquirerโs P/E should be greater than the targetโs for an all-stock deal to be accretive. Vice versa itโs dilutive. The interviewer told you the deal is accretive, so something has to give. The typical rule of thumb assumes: - There are no synergies - Reported earnings are the true underlying earnings - There is no growth in target earnings Here are three ways the M&A math can flip. 1. Synergies. Assume synergies lift target earnings by 25%. The multiple youโre effectively paying drops. That alone can flip the math. 2. Normalized earnings. If thereโs a one-time charge dragging earnings down, like a restructuring charge, you strip it out and run the normalized P/E. That can paint a very different picture. 3. Growth. The P/E rule is static. If the target is growing rapidly, the same earnings a few years out could result in a highly accretive deal. Think year 2, year 3, year 4. Not just year 1. ๐ง People ask this to test whether you memorized the rule or grasp the underlying point. Follow @FinanceableTraining to level up your IB/PE game every day. #ibinterview #investmentbankingprep #mergersandacquisitions #financeabletraining investmentbanking
Original Description
IB interviewers love this question.
Acquirer at 12x P/E. Target at 15x P/E. All-stock deal. The deal is accretive to the acquirer. Why?
๐ก Save this to nail your interview.
The textbook rule says the acquirerโs P/E should be greater than the targetโs for an all-stock deal to be accretive. Vice versa itโs dilutive. The interviewer told you the deal is accretive, so something has to give.
The typical rule of thumb assumes:
- There are no synergies
- Reported earnings are the true underlying earnings
- There is no growth in target earnings
Here are three ways the M&A math can flip.
1. Synergies. Assume synergies lift target earnings by 25%. The multiple youโre effectively paying drops. That alone can flip the math.
2. Normalized earnings. If thereโs a one-time charge dragging earnings down, like a restructuring charge, you strip it out and run the normalized P/E. That can paint a very different picture.
3. Growth. The P/E rule is static. If the target is growing rapidly, the same earnings a few years out could result in a highly accretive deal. Think year 2, year 3, year 4. Not just year 1.
๐ง People ask this to test whether you memorized the rule or grasp the underlying point.
Follow @FinanceableTraining to level up your IB/PE game every day.
#ibinterview #investmentbankingprep #mergersandacquisitions #financeabletraining investmentbanking
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