M&A valuation, from standalone value to offer price
M&A valuation is how a buyer and its bankers work out what a target is worth on its own and how much more they can pay for control. Bankers value it with trading comps, precedent transactions, a DCF and an LBO, then add a premium the synergies must pay for. In our worked example a $20 stock gets a $25 offer, a 25% premium, still below the $26.50 a share the cost synergies justify. Soreno, an AI voice interview practice app for consulting, investment banking and other finance candidates, runs investment banking interview practice with follow-up questions on your numbers.
Updated
- Value it alone first. Comps, precedents, a DCF and an LBO give a range for the target as it stands.
- Then price control. The offer adds a premium over the unaffected share price to get shareholders to sell.
- Synergies fund the premium. Pay more than the synergies are worth and the buyer's shareholders lose.
- Accretion is a check. A deal can lift earnings per share and still overpay. It isn't a valuation.
- Show it on one chart. The football field puts every method's range and the offer side by side.
How bankers value a company in a deal
A bank values the target on its own first, then works out what a buyer can pay on top. The methods are in our own words. The last row shows them in a real merger proxy.
Standalone value: the five methods5 methods
Each gives a range. The overlap is what you defend.
Trading comps
What similar listed companies trade at
Pick public peers, take a multiple like EV/EBITDA or P/E and apply the range to the target. It values a small stake today, with no control premium.
Walk me through a comps analysisPrecedent transactions
What buyers paid for similar companies
Multiples from past acquisitions in the sector. They include the premiums those buyers paid, so they usually sit above comps. Old deals carry old markets with them.
Walk me through precedentsDCF
The cash the business will produce
Forecast free cash flow, discount it at the WACC and add a terminal value. It leans on no other company's price, and small changes in the discount rate or growth move it a lot.
Walk me through a DCFLBO
What a private equity buyer could pay
Work back from a return target, say 20% to 25% a year, with the debt lenders would provide. Often the floor, since a strategic buyer with synergies can pay more.
A paper LBO, workedSum of the parts
Each division at its own multiple
For a company with unrelated businesses. Value each one against its own peers, add them up and subtract net debt. Useful when a buyer wants only one division.
From standalone value to offer price4 steps
What a buyer adds on top of what the target is worth alone.
Start
The unaffected price
The share price before news of a deal leaked, checked against where the methods overlap. Premiums are measured from it.
Premium
Pay for control
Shareholders sell only above the market price. The control premium is the offer over the unaffected price, and it buys the right to run the company.
What is a control premium?Synergies
Cost first, revenue second
Cost synergies, like closing overlapping offices, are in the buyer's control. Revenue synergies, like cross-selling, depend on customers. Our advice: pay for cost synergies and treat revenue ones as upside.
What are synergies?The split
Who keeps the synergies
The premium is how the buyer hands synergy value to the seller. A premium larger than the synergies' net value transfers more than the deal creates, however good the earnings look.
Accretion and dilution: a check, not a valueOur view
Bankers run it on every deal. It answers a different question.
What it asks
Does the buyer's EPS go up?
Add both companies' net income, subtract the after-tax cost of new debt, add after-tax synergies and divide by the new share count.
An accretion and dilution exampleWhy it isn't value
EPS can rise while value falls
A deal paid with cheap debt can lift EPS and still overpay. Accretion hints at how the market may read the deal on day one. The methods above say whether the price is right.
A quick test
Compare the yields
The target's earnings yield at the offer price is its net income over the price. If it beats the cost of what you pay with, the deal is accretive before synergies.
The football fieldOne chart
What it is
Each method as a bar
One horizontal bar per method, from its low to its high value per share, with the 52-week trading range and the offer drawn on top. The board sees the whole valuation on one page.
What is a football field chart?How to read it
Look where the bars overlap
An offer above comps and the DCF but inside precedents pays a control premium in line with past deals. An offer above every bar needs a synergy case to back it.
A real deal: Summit Materials and QuikreteFrom the merger proxy
Summit's board had two banks give fairness opinions. Evercore's ranges, per share, as Summit's proxy states them.
The offer
$52.50 a share in cash
The proxy calls it a premium of about 29.2% over the unaffected price of $40.62, the close on October 23, 2024.
The methods
DCF, comps and precedents
Morgan Stanley and Evercore each ran a discounted cash flow, a public companies analysis and a precedent transactions analysis.
Evercore's DCF
$41.75 to $61.50
Discount rates of 10.50% to 11.75% and perpetuity growth of 4.0% to 5.0%, on management's forecasts.
Evercore's comps
$42.75 to $59.50
10.0x to 13.0x Summit's 2024 estimated adjusted EBITDA, against a peer median of 13.5x.
Evercore's precedents
$47.25 to $58.25
11.0x to 13.0x Summit's last twelve months of adjusted EBITDA, from building materials deals announced since 2014.
For reference
Premiums paid: $49.00 to $57.00
In 48 deals and bids for U.S. public targets of $5 billion to $15 billion over ten years, Evercore found a median premium of 37% to the 30-day volume weighted average price. It applied 25% to 45%.
What interviewers test on M&A valuation
No bank publishes a scorecard. This is our read of what a strong answer shows:
The right method for the question
Comps for today's market value, precedents for what buyers pay, a DCF for intrinsic value, an LBO for what a sponsor can afford. Say which one and why.
A range, then a view
Give the range each method produces, then say where in it you'd land and what pushes you up or down.
Healthy doubt about synergies
Size them, say what they cost to get, and say how much of them you'd pay away. Interviewers probe the revenue ones hardest.
A worked example: a $20 stock, a $25 offer
A made-up target and buyer. The numbers are ours, in millions of dollars except figures per share.
Show the nine steps
The target
$20 a share, 12.0x EBITDA
TargetCo has $200M of EBITDA, $400M of net debt and 100M shares. At $20 its equity is worth $2,000M and its enterprise value is $2,400M, or 12.0x EBITDA.
Comps
$16 to $22
Listed peers trade at 10x to 13x EBITDA. 10 × $200M = $2,000M, less $400M of net debt, over 100M shares = $16. At 13x it's $22.
Precedents
$20 to $26
Past deals in the sector were done at 12x to 15x EBITDA. That gives enterprise values of $2,400M to $3,000M, or $20 to $26 a share.
DCF
$18 to $22
Next year's free cash flow is $143M, growing 3% a year. At a WACC of 9.5%, $143M ÷ (9.5% less 3%) = $2,200M, so $18 a share. At 8.5% it's $2,600M, so $22.
LBO
$14.55 to $16.04
A sponsor borrows 6x EBITDA, $1,200M. In year 5 it sells at 11x $250M of EBITDA = $2,750M, repays the $750M of debt left and keeps $2,000M. For 20% a year it can put in $2,000M ÷ 1.2^5 = $804M today, so it pays $2,004M for the company, $16.04 a share. For 25% it pays $14.55.
Synergies
$6.50 a share
Cost synergies of $60M a year, valued at the target's 12.0x, are worth $720M. Less $70M of one-time costs to get them, that's $650M, or $6.50 a share. The $30M of revenue synergies ($3.60 a share) get no value in the price.
The offer
$25, a 25% premium
$20 plus all the cost synergies gives a walk-away price of $26.50. At $25 the seller gets $500M of the $650M, 77%, and the buyer keeps $150M. The offer is 14.5x EBITDA, or 11.2x counting run-rate cost synergies.
Football field
The offer against every bar
LBO $14.55 to $16.04, comps $16 to $22, DCF $18 to $22, 52-week range $17 to $23, precedents $20 to $26. The $25 offer sits above comps and the DCF and inside precedents.
Accretion check
3.3% dilutive, 4.7% accretive with synergies
BuyerCo trades at $50 with 200M shares and $500M of net income, so $2.50 of EPS. It pays the $2,500M half with new debt at 6% and half with 25M new shares. Net income is $500M plus $100M less $56.25M of after-tax interest = $543.75M, over 225M shares = $2.42. Add $45M of after-tax synergies and EPS is $2.62. Breakeven takes $25M of pre-tax synergies. Why dilutive first: the target's earnings yield at the offer is 4%, below the 4.5% after-tax cost of debt and BuyerCo's 5% earnings yield.
All numbers are made up for practice. Figures per share are rounded to the cent.
18 M&A valuation interview questions
Our own wording, in four groups. Expect the first two groups in any banking technical round and the last two in M&A group interviews.
The valuation methods6 questions
Say what each method measures before you say how to run it.
How would you value a company?
What a strong answer does
Name the methods, what each one measures and which you'd lean on for this company, then say you'd show them as ranges. Practice it, see a model answer
- “Which method would you trust most here?”
- “What if the company has no profits?”
Walk me through a comparable company analysis.
What a strong answer does
Pick peers, spread their multiples, choose a range and apply it to the target, then bridge from enterprise value to a share price. Practice it, see a model answer
How do you pick comparable companies?
What a strong answer does
Same industry and business model first, then size, growth and margins. Say what you'd do when there are only two true peers. Practice it, see a model answer
Walk me through a precedent transactions analysis.
What a strong answer does
Find past deals for similar targets, take what buyers paid as a multiple and apply it. Say why the result includes a control premium. Practice it, see a model answer
- “How old is too old for a precedent?”
Walk me through a DCF.
What a strong answer does
Free cash flow, the discount rate, terminal value, then the bridge to equity value, in plain words and in that order. Practice it, see a model answer
Which valuation method usually gives the highest value, and why?
What a strong answer does
Precedents, usually, since they carry control premiums. Then say when a DCF beats them, such as aggressive forecasts. Practice it, see a model answer
Premium, synergies and price5 questions
Where M&A valuation differs from valuing a stock.
What is a control premium?
What a strong answer does
The offer over the unaffected price, paid for the right to run the company. Tie it to synergies or a better plan that pays for it. Practice it, see a model answer
What are synergies, and which kind would you trust more?
What a strong answer does
Cost synergies, since the buyer controls them. Mention the one-time cost to achieve them and how long they take. Practice it, see a model answer
- “How would you value $60 million a year of cost synergies?”
Why can a strategic buyer usually pay more than a private equity firm?
What a strong answer does
Synergies, a lower cost of capital and no need to sell in five years. The LBO sets the floor a sponsor can match. Practice it, see a model answer
Synergies are worth $6.50 a share and the stock is at $20. What's the most you'd offer?
What a strong answer does
$26.50 pays the seller every dollar of synergy value. A strong answer names a lower offer, says what share of the synergies it gives away and why.
- “What if a rival bidder appears?”
What is a football field chart, and how do you use it?
What a strong answer does
Each method's range as a bar, the trading range and the offer on top. Say what it means when the offer sits above every bar. Practice it, see a model answer
Accretion, dilution and how to pay4 questions
The merger model questions. Keep them separate from value.
How do you tell whether an acquisition is accretive or dilutive?
What a strong answer does
Compare the target's earnings yield at the offer with the cost of each kind of payment, then confirm with pro forma EPS. Practice it, see a model answer
- “Does accretive mean the deal creates value?”
- “How many synergies does it take to break even?”
Walk me through a merger model.
What a strong answer does
Purchase price, sources and uses, combined income statement, new shares and debt, then pro forma EPS against the buyer's own. Practice it, see a model answer
Why would a company do a deal that's dilutive?
What a strong answer does
Strategy, growth or synergies that arrive after the first year. Show you know EPS in year one isn't the point. Practice it, see a model answer
Would a buyer rather pay with cash, debt or stock?
What a strong answer does
Compare the after-tax cost of each with the target's earnings yield, then add risk: who bears it if the deal goes badly. Practice it, see a model answer
Value bridges and live deals3 questions
Mechanics and market awareness.
What is the difference between enterprise value and equity value?
What a strong answer does
Enterprise value belongs to all capital providers, equity value to shareholders. Bridge with net debt and say which multiple pairs with each. Practice it, see a model answer
How do higher interest rates affect valuations and M&A?
What a strong answer does
A higher discount rate cuts DCF values, debt costs more so LBO prices fall, and stock deals look different against cash. Practice it, see a model answer
Tell me about a recent deal you've followed.
What a strong answer does
The buyer, the price and premium, why the buyer did it and one thing you'd question. Read the merger proxy if it's public. Practice it, see a model answer
- “Did the buyer overpay?”
- “Who else could have bid?”
More to prepare with
Mistakes that cost candidates on M&A valuation
One number instead of a range
Every method gives a range. Give it, then say where you'd land and why.
Mixing enterprise and equity value
An EV/EBITDA multiple gives enterprise value. Subtract net debt before you divide by shares.
Paying for revenue synergies
They depend on customers the buyer doesn't control. Value them separately and say how much you'd pay away.
Calling accretion value creation
Cheap debt can make an overpriced deal accretive. Answer the value question with the methods, not EPS.
Know the methods, then defend them out loud
Soreno's AI interviewer asks valuation and merger questions one at a time, follows up on your numbers like a banker would and scores every answer.
Questions people ask
What is M&A valuation?
Working out what a target company is worth on its own and how much a buyer can pay to control it. Bankers value it with several methods, then add a premium that synergies have to cover.
What are the main M&A valuation methods?
Trading comps, precedent transactions, a discounted cash flow and an LBO, plus sum of the parts for companies with separate divisions. In Summit Materials' sale to Quikrete, both of Summit's banks ran a DCF, comps and precedents.
How do you value synergies in an acquisition?
Take the run-rate yearly synergies, value them at a multiple or with a DCF, and subtract the one-time cost to get them. In our example, $60M a year at 12.0x less $70M is $650M.
What is a control premium in M&A?
The amount an offer pays over the target's unaffected share price. Summit Materials' $52.50 offer was about 29.2% over its $40.62 unaffected price, according to its merger proxy.
Is accretion and dilution a valuation method?
No. It shows how the buyer's earnings per share change. A deal can be accretive and still overpay, so bankers use it as a check next to the valuation methods.
Why do precedent transactions give higher values than comps?
Comps price a small stake in a listed company. Precedents are prices buyers paid for whole companies, so they include control premiums and the synergies those buyers expected.
What does M&A valuation support mean?
Valuation work done for a deal: an independent value for a buyer or a board, or a fairness opinion like the ones Summit's banks gave. Interviews for those teams test the same methods as this page.