CFM CFM M&A Modeling & Deal Structuring 1 — Questions and Answers
Question 1: In an M&A accretion/dilution analysis, a deal is considered 'accretive' when:
- The target's revenue exceeds the acquirer's revenue
- The acquirer's post-deal EPS is higher than its standalone EPS (Correct answer)
- The deal is financed entirely with cash rather than stock
- The target's EBITDA margin is above 30%
Correct answer: The acquirer's post-deal EPS is higher than its standalone EPS
A deal is accretive when the combined entity's earnings per share exceeds what the acquirer would have earned on a standalone basis.
Question 2: Which of the following is the primary driver of dilution in an all-stock acquisition?
- Increased depreciation from asset write-ups
- New shares issued to target shareholders dilute the acquirer's EPS (Correct answer)
- Higher interest expense from acquisition debt
- Goodwill impairment charges recorded post-close
Correct answer: New shares issued to target shareholders dilute the acquirer's EPS
In a stock deal, the acquirer issues new shares to fund the purchase, increasing the share count and potentially diluting existing shareholders' EPS.
Question 3: What does 'purchase price allocation' (PPA) require in M&A accounting under US GAAP?
- Allocating synergies to specific cost centers before close
- Assigning the acquisition price to identifiable assets and liabilities at fair value, with the remainder as goodwill (Correct answer)
- Distributing deal fees proportionally between buyer and seller
- Recording all intangibles at historical cost
Correct answer: Assigning the acquisition price to identifiable assets and liabilities at fair value, with the remainder as goodwill
Under ASC 805, the acquirer must allocate the purchase price to all identifiable assets and liabilities at fair value; any excess is recorded as goodwill.
Question 4: In an M&A deal, which type of synergy refers to cost savings achieved by combining two companies' operations?
- Revenue synergies
- Cost synergies (Correct answer)
- Tax synergies
- Financial synergies
Correct answer: Cost synergies
Cost synergies include headcount reductions, facility consolidations, and overlapping function eliminations that reduce total operating expenses post-merger.
Question 5: What is the 'breakeven synergy' in an M&A context?
- The minimum revenue growth rate needed to avoid EPS dilution
- The level of synergies required to justify the premium paid over the target's standalone value (Correct answer)
- The point at which deal fees equal the target's annual EBITDA
- The synergy amount that exactly offsets integration costs
Correct answer: The level of synergies required to justify the premium paid over the target's standalone value
Breakeven synergies represent the minimum synergy realization needed to make the acquisition price economically rational given the premium paid.
Question 6: Which structure allows an acquirer to purchase a target's assets without assuming all of its liabilities?
- Stock purchase
- Asset purchase (Correct answer)
- Merger of equals
- Tender offer
Correct answer: Asset purchase
In an asset purchase, the buyer selects specific assets and liabilities to acquire, leaving unwanted liabilities (such as contingent legal claims) with the seller.
CFM CFM M&A Modeling & Deal Structuring 1
In an M&A accretion/dilution analysis, a deal is considered 'accretive' when: