Complex Technical Questions #
1. “Walk me through different types of merger structures and their implications.” #
Comprehensive Analysis:
Structure Types: #
Asset Purchase
Key Features:
- Buyer acquires specific assets
- Selective assumption of liabilities
- Individual asset transfer
Tax Implications:
- Step-up in basis
- Depreciation benefits
- Transfer taxes
Legal Considerations:
- Contract assignments
- Third-party consents
- Employee transfers
Stock Purchase
Key Features:
- Acquisition of shares
- All assets and liabilities transfer
- Legal entity continues
Tax Implications:
- No step-up in basis
- Carry-over tax attributes
- Stock basis considerations
Legal Considerations:
- Shareholder approval
- Securities laws
- Minority interests
Merger Structures
Forward Merger:
- Target merges into acquirer
- Acquirer survives
- Target dissolves
Reverse Merger:
- Acquirer merges into target
- Target survives
- Public company backdoor
Triangular Merger:
- Uses acquisition subsidiary
- Parent stock consideration
- Tax efficiency focus
Selection Factors:
Tax Considerations
- Basis step-up
- NOL preservation
- Transaction taxes
Liability Protection
- Known liabilities
- Unknown risks
- Successor liability
Third-Party Matters
- Contract assignments
- License transfers
- Regulatory approvals
2. “How do you value intangible assets in an acquisition?” #
Detailed Response:
Valuation Approaches:
Income Approach
Methods:
- Relief from Royalty
- Multi-Period Excess Earnings
- Incremental Cash Flow
Considerations:
- Revenue attribution
- Profitability impact
- Life expectancy
- Obsolescence risk
Market Approach
Methods:
- Comparable transactions
- Industry benchmarks
- Licensing agreements
Key Factors:
- Similar assets
- Market conditions
- Industry standards
- Technological relevance
Cost Approach
Methods:
- Replacement cost
- Reproduction cost
- Historical cost
Adjustments:
- Obsolescence
- Functionality
- Economic utility
- Development time
Specific Intangibles Analysis:
Customer Relationships
Valuation Factors:
- Attrition rates
- Profitability
- Growth potential
- Switching costs
Technology
Considerations:
- Development stage
- Competitive advantage
- Obsolescence risk
- Market potential
Brand Value
Analysis:
- Brand strength
- Market position
- Revenue premium
- Protection period
3. “Explain different types of leveraged finance instruments and their characteristics.” #
Comprehensive Breakdown:
Senior Secured Debt
First Lien:
- Highest priority
- Asset backing
- Lowest interest rate
- Maintenance covenants
Second Lien:
- Subordinate to first lien
- Higher yields
- Similar collateral
- Incurrence covenants
Mezzanine Financing
Characteristics:
- Subordinated debt
- Equity kickers
- Higher yields
- PIK options
Terms:
- Longer maturities
- Limited covenants
- Call protection
- Warrants/options
High Yield Bonds
Features:
- Unsecured/junior
- Fixed coupons
- Public markets
- Incurrence covenants
Structure:
- Non-call periods
- Make-whole provisions
- Change of control
- Optional redemption
Term Loan B
Characteristics:
- Institutional investors
- Limited amortization
- Higher spreads
- Covenant-lite
Terms:
- LIBOR floors
- Prepayment flexibility
- Trading expectations
- Minimal financial covenants
4. “How do you evaluate synergies in M&A transactions?” #
Detailed Framework:
Types of Synergies:
Revenue Synergies
Sources:
- Cross-selling
- Geographic expansion
- Product bundling
- Pricing power
Analysis:
- Market overlap
- Customer relationships
- Distribution channels
- Brand strength
Cost Synergies
Categories:
- Personnel reduction
- Facility consolidation
- IT integration
- Procurement savings
Quantification:
- Headcount analysis
- Overhead allocation
- System costs
- Supplier contracts
Financial Synergies
Types:
- Tax benefits
- Capital structure
- Working capital
- Financing costs
Evaluation:
- NOL utilization
- Debt capacity
- Cash management
- Rating impact
Implementation Considerations:
Timing
Factors:
- Integration schedule
- Resource availability
- Market conditions
- Regulatory approvals
Costs
Categories:
- One-time costs
- Integration expenses
- Severance
- Professional fees
Risks
Assessment:
- Execution risk
- Cultural fit
- Customer retention
- Employee morale
5. “Walk me through different purchase price adjustments in M&A deals.” #
Comprehensive Analysis:
Types of Adjustments:
Working Capital
Mechanism:
- Target working capital
- Closing calculation
- True-up process
- Settlement terms
Components:
- Receivables
- Inventory
- Payables
- Other current items
Net Debt
Elements:
- Funded debt
- Cash balances
- Capital leases
- Other obligations
Adjustments:
- Timing considerations
- Trapped cash
- Restricted cash
- Debt-like items
Other Adjustments
Capex Requirements:
- Maintenance capex
- Growth projects
- Committed spending
- Project completion
Transaction Expenses:
- Advisory fees
- Legal costs
- Accounting charges
- Integration costs
Purchase Agreement Provisions:
Definitions
Key Terms:
- Working capital components
- Excluded items
- Calculation methodology
- Reference dates
Process
Steps:
- Estimated closing statement
- Review period
- Dispute resolution
- Final settlement
Protections
Mechanisms:
- Escrow accounts
- Holdback amounts
- Earn-outs
- Indemnification
6. “How do you analyze covenant compliance in leveraged finance?” #
Detailed Framework:
Financial Covenants:
Leverage Ratio
Calculation:
- Total Debt/EBITDA
- Net Debt/EBITDA
- Senior Debt/EBITDA
Adjustments:
- Pro forma events
- Add-backs
- Exclusions
- Cure rights
Interest Coverage
Components:
- EBITDA/Interest
- Fixed charge coverage
- Debt service coverage
Analysis:
- Cash vs. accrual
- Capitalized interest
- Payment timing
- Coverage cushion
Other Metrics
Maximum Capex:
- Annual limits
- Carryforward
- Carryback
- Growth capex
Minimum Liquidity:
- Cash requirements
- Revolver availability
- Working capital
Covenant Analysis:
Testing
Process:
- Calculation periods
- Compliance certificates
- Reporting requirements
- Officer certificates
Amendments
Considerations:
- Market conditions
- Company performance
- Lender relationships
- Amendment fees
Remedies
Options:
- Equity cure
- Asset sales
- Debt paydown
- Refinancing