M&A motivations | Approaching M&A cases | M&A question bank | Example case walk-through #1 | Example case walk-through #2
Acquisitions are exciting and make for great headlines, but the decision to pursue one is serious business - and makes for a great case interview topic!
For example, consider mega deals like Salesforce acquiring Tableau for $15.7B or Kraft and Heinz merging at a combined valued of $45B. Mergers and acquisitions (often abbreviated as M&A) are some of the splashiest business decisions, often due to the large size of the deals and ability to quickly shake up market share.
Like profitability or market entry cases, M&A questions will often come up during a case interview, either as the primary topic or as a component of a broader case.
Before jumping into case interviews, let's talk about why a company might pursue a merger or an acquisition in the first place. There are 3 main factors that drive M&A decisions: growth, competition, and synergies.
When determining a long-term growth strategy, companies have several options they tend to consider: build, buy, or partner. Amazon's growth into the grocery industry is a great example of a company implementing both build and buy strategies.
Amazon began by leveraging their existing capabilities to build their offering internally, adding food products to their platform and same-day food delivery. However, in 2017 they announced the acquisition of Whole Foods. By purchasing an existing player in the grocery space, they were able to acquire not only the Whole Foods brand, customer base, and retail footprint, but also the employees, supplier relationships, and industry know-how. The acquisition allowed them to grow at a quicker pace than they would have been able to otherwise.
Competition can be another big driver behind M&A activity. Consider Uber and Didi's merger in 2016. Both companies were spending enormous amounts of money to gain market share (Uber's losses were estimated at ~$2B), but were still not achieving profitability. By coming to a merger agreement, Uber and Didi were able to end the destructive competition in China and move forward as partners with a shared interest in each other's success.
Other companies pursue mergers or acquisitions due to the complementary nature of combining two businesses. These complementary aspects are called synergies and might include things like the ability to cut out redundant overhead functions or the ability to cross-sell products to shared customers.
The value of potential synergies is typically estimated prior to doing a deal and would be one of the biggest points of discussion for the buyer. Note that the task of estimating the value of synergies is often more art than science, and many companies overvalue the expected synergies they'll get from a deal. This is just one of the reasons more than 70% of M&A deals fail.
The synergies that can be realized through a merger or acquisition will be different for any given pair of companies and will be one of the primary determining factors in a purchase price. For example, the synergies between a mass retailer buying a smaller clothing company will be much larger than if a restaurant were to buy that same clothing company. Common cost structures and revenue streams often result in greater synergies. For example, two similar businesses that merge will be able to streamline their finance, HR, and legal functions, resulting in a more efficient operation.
Mergers and acquisitions are not entered into by companies lightly. These are incredibly strategic decisions that are enormously expensive, from both a time and resource perspective, so any leadership team will want to do their due diligence and consider these decisions from multiple angles.
While each M&A scenario will have its own unique factors and considerations, there are some recurring topics you'll most likely want to dive into. We'll cover these in five steps below.
💡 Remember that every case is unique. While these steps can apply to many M&A cases, you should always propose a framework tailored to the specific case question presented!
Before recommending a merger or acquisition, the first step is to understand the deeper purpose behind this strategic decision. The motivation might be hinted at in your case prompt, or it might be apparent given general knowledge of a particular industry.
For example, if the question is "Snack Co. is looking to expand into Asia and wants to determine if an acquisition of Candy Co. would be successful", you can tell that the underlying motivation for acquisition is growth through geographic expansion. If the question is about an airline looking to buy another airline, the drivers are likely the competitive nature of the industry and potential synergies in the cost structure.
Once you understand what's driving the M&A desire, you'll know what lens to apply throughout the remainder of the case. You'll also be able to weave in your business acumen in your final recommendation.
As with many case interviews, a well-rounded market analysis is typically a good place to start. In this scenario, the market we're evaluating is that of the target company. The goal here is to develop a broad understanding of the attractiveness of the market, as the client is essentially investing in this space through M&A activity. For this step, consider:
This step should not be skipped, even in the case of a merger between two companies in the same market. It can't be assumed that the market is attractive just because the buyer is in it already. Rather, if the market evaluation proves unattractive, the buyer should not only avoid the deal, but also address their existing strategy internally.
If the market is deemed to be attractive, the next question is if the target is the optimal company to acquire or merge with in that market. The main points to address here are:
Next, consider the pros and cons of doing the deal. Where might the buyer be able to realize synergies with the target? What are the biggest risks to doing the deal? What might derail the integration? For this part, consider these key questions:
Finally, pull all of your findings together and share your final recommendation. Make sure to support your argument with data from the earlier steps and note what you would want to look at if you had more time.
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Below, you'll a see list of M&A case questions sourced from a top candidate - Ana Sousa, an ex-McKinsey Business Analyst currently pursuing her MBA at OSU.
Case A background:
Our client, NewPharma, is a major pharmaceutical company with USD 20 billion in annual revenue. Its corporate headquarters is located in Germany, with sales offices around the world. NewPharma has a long, successful record in researching, developing, and selling “small molecule” drugs. This class represents the majority of drugs today, such as aspirin. They would like to enter a new, fast-growing segment of biological drugs, which are made with large and more complex molecules, and can treat conditions not addressable by conventional drugs. The Research and Development (R&D) associated with biological molecules is completely different from small molecules. In order to acquire these capabilities, a pharma company can build them from scratch, partner with startups, or acquire them. Competition is already many years ahead of NewPharma, so they are looking to jumpstart their own program by acquiring BioAdvance, a leading biologicals startup headquartered in San Francisco. BioAdvance was founded 10 years ago by renowned scientists and now have 200 employees. It is publicly traded, and at current share price, they are worth around USD 2 billion.
Case B background:
Total Energy Inc. (TEI) is a private, medium-sized company with a strong history of drilling and producing natural gas wells in Pennsylvania. They own an ample, and believe valuable, set of land assets where more wells could be drilled. The company is well capitalized but has seen profits decline for the last few years, with a projection of loss for the next year. One of the main drivers is the price of natural gas, which has dropped considerably, mainly because companies like TEI have perfected unconventional drilling techniques, leading to an oversupply of the North American market. Current prices are at a five year low. A larger competition has approached TEI’s leadership about acquiring them for an offer of USD 250 million.
Case C background:
Tech Cloud has developed a new research engine designed to increase online retail sales by reshaping customer search results based on real-time customer data analysis. An initial assessment indicates outstanding results in increasing sales, and therefore a tremendous potential for this product. However, Tech Cloud is a small startup, so they do not currently possess the capabilities to sell and install their algorithm in large scale. A major tech company has approached Tech Cloud with a partnership offer: to help them make the new product scalable, offering to pay $150M for it as is, and asking for 50% of profits on all future sales of the new research engine.
Case D background:
Snack Hack is the fifth largest fast-food chain in the world in number of stores in operation. As most competitors, Snack Hack sells fast-food combo meals for any time of the day. Although Snack Hack owns some of its store, it is mainly operating under a franchising business model, with 85% of its operating stores owned by franchisees. As part of a growth strategy, Snack Hack has been analyzing Creamy Dream as a potential acquisition target. Creamy Dream is a growing ice cream franchise with a global presence. While they also operate by franchising, there is a difference: Snack Hack franchises restaurants (stores), while Creamy Dream franchises areas or regions in which the franchisee is required to open a certain number of stores.
We'll now use our framework to tackle one of the example questions we listed above. Let's focus on Case A and answer the following question:
Following our recommended framework, the first step is to identify the underlying purposes of the acquisition. In this case, you can tell from the context information that their strategic motivation is to enter a new type of drug market. The case has already stated your alternatives outside of this M&A: to build capabilities from scratch or make a partnership/acquisition of a different target.
Step 2 in our framework is to evaluate the market. You are told the biological segment is fast-growing, and does not overlap with NewPharma current products, therefore there is no risk of cannibalization. You still need to know who currently competes in this segment, what is the general profitability of these drugs and how it compares to small molecule drugs, and deep dive on the regulation for these drugs, since pharma industry is strongly regulation-driven.
Next, we jump into step 3, which is assessing the target. This is where we were given the smallest amount of information, so there is much to cover. R&D is a time-consuming process, and NewPharma will not see profits for drugs they start developing together in case of an acquisition in many years, maybe decades. Therefore, the first thing to look at is the value of BioAdvance’s current drug pipeline, or, in other words, what drugs are they currently developing, their likelihood of success, and their expected revenues and profits.
Another key factor is their capabilities, which is what NewPharma is mostly interested in. What does BioAdvance bring to the table in terms of scientific talent, intellectual property, and research facilities? We also want to look at whether they have current contracts or partnerships with other competitors.
Furthermore, besides their main capability which is research, NewPharma should also learn about their marketing and sales capabilities, to identify any synergies in global sales, and also to understand how they currently promote biologicals, since NewPharma has no experience in this. A great structure would also consider any gaps BioAdvance might have, both in R&D and marketing capabilities. Lastly, NewPharma needs to conduct a due diligence to assess the value of BioAdvance, and therefore the acquisition price.
Step 4 is identifying the risks and benefits. In a high level, the risks include potential of them having a weak pipeline, which would mean not seeing any profits for years. In addition, NewPharma is a European country, while BioAdvance is from California, which means there is a risk of cultural barriers between both their leaderships and their R&D scientists. In addition, there is the risk that entering this new drug market is not aligned with NewPharma’s strategy or core competencies. The benefits include quickly adding R&D capabilities to catch up with their competitors and addressing a new segment of customers that they currently do not serve.
Let's walk through another example M&A case to illustrate how the framework we've introduced might be applied in practice. We'll lay out the thought process a candidate would be expected to demonstrate in a case interview. Here's our prompt:
Our first step is to consider why Edu Co. is pursuing an acquisition. From the prompt, we can see that they're an established business looking to acquire a newer entry to the market. Edu Co. has focused on their core capabilities - content and printing - but has not invested in a digital product.
Edu Co. is clearly eyeing the startup target as a way to accelerate their growth into the edtech space. Rather than investing in building a digital product themselves, Edu Co. is looking to buy a company that already has a strong product, customer base, and team.
To begin, we would want to evaluate the digital education market. We might ask for more information on the size and growth rate to start. If we find out the market is large and forecasted to grow at 10% per year, that tells us it's a fairly attractive market.
In terms of barriers to entry, there is limited regulation around K-12 content and assessment. In the edtech space, the main concern is around the secure storage of information having to do with minors.
The competitive landscape is something we would want to ask for more information about. We would want to know how many other companies were pursuing these products and which had the most market share. If the market is highly fragmented, it means there is still room for a clear winner to emerge.
Regarding customer dynamics, we would want to know about any indications of changing preferences. For example, the push towards remote learning during COVID-19 would be relevant, as teachers and students have quickly become more comfortable with digital products.
Once we've determined that the market for digital education is attractive, we'll want to turn our attention to the target company. We would start by asking the interviewer for any information on the company's finances, team, market share, and other assets.
Assume the interviewer gives us revenue, profit, and market share data for the past 3 years. As part of our due diligence, we would want to ensure that all three of these metrics were either stable or growing. If we saw dips in this data, it would be important to dive deeper and understand why their performance had declined.
We would also want to know what their organizational structure looked like. If their staff was primarily sales & marketing (meaning they had outsourced their engineering work), they would be a less attractive target, as acquiring the tech personnel was one of the big reasons Edu Co. was looking to buy the business.
Finally, we would want to understand the technology they had developed. It would be important to understand the strengths and weaknesses of their product as well as any patents or IP.
Next, we would want to lay out any risks or benefits to acquiring the company.
The biggest risk we see is that the two company cultures are very different - Edu Co. is large, slower to make changes, and has an older workforce, whereas the other is much smaller, more agile, and younger. If we tried to integrate these two companies, there may be friction between the two working styles.
On the benefits side, there is potential for both cost and revenue synergies. On the cost side, we would be able to cut redundant administrative roles out, such as HR and finance. On the revenue side, Edu Co. may be able to leverage their customer relationships to cross sell digital products.
Eventually, the interviewer would ask if Edu Co. should pursue the acquisition. Here, we would want to pull all the findings together and lay out our reasoning. Start with the answer first:
Recommendation: "Edu Co. should acquire the edtech startup. It's an attractive market that's growing rapidly and doesn't have a clear leader yet. Furthermore the startup appears to be well-positioned in the market: their revenues, profits, and market share have been growing. As Edu Co. looks to grow into the digital education space, this acquisition will give them a leg-up on competitors. Edu Co. will also be able to leverage their customer relationships to rapidly expand the use of this new digital product. However, Edu Co. will want to develop a robust integration plan to mitigate the risk of culture clash. They may want to consider letting the startup remain in their existing HQ to retain their agile working style."
As discussed, M&A cases are fairly common because they have the potential to cover a lot of ground, relevant business challenges.
Realize that in a real M&A case, the due diligence on the target alone could take weeks. It's likely your interviewer will have you dive deeper into one specific step to observe your thought process. In that case, stick with your structure, follow their lead, and always lay out the next steps you would follow if you had more time.
Finally, keep in mind that M&A doesn't just come up because it's fun to analyze; it's also an important source of revenue for the firms - Bain's private equity group does hundreds of due diligence cases annually and BCG's post-merger intergration (PMI) practice makes good money helping firms execute a merger successfully.
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