PartnerRound- 01RationaleWhy buy, and why this target
- 02Standalone valueWhat it's worth as it is
- 03SynergiesExtra value only we create
- 04PricePay less than value plus synergies
- 05RisksWhat could make it fail
By the end you can
- Structure any acquisition case around one test: is the price below standalone value plus net synergies?
- Value a target on an EBITDA multiple and size its cost and revenue synergies in a few minutes
- Work out the maximum price and say how much of the synergy value a given price hands to the seller
- Tell a private equity deal from a strategic one and judge each on the right measure
On this page
- The structure: one question, four parts
- Strategic rationale: why buy, why this target
- Standalone value: what the target is worth as it is
- Synergies: cost is likely, revenue is a hope
- Price: the most you should pay
- Worked example: is $780m worth paying?
- Risks and integration
- Private equity buyer or strategic buyer
01The structure: one question, four parts
Every M&A case, however it's worded, comes down to one question: is the target worth more to our client than the price? 'Should we buy them?', 'How much should we offer?' and 'Is this a good deal?' are the same question in different clothes.
So build the structure around that test. Four parts, in the order you'd want the answers.
Weak
I'd look at the market, the target company, its financials and the synergies, and then decide whether to do the deal.
Strong
The deal creates value only if Target is worth more to us than we pay. I'd test that in four parts: why buy at all, and why this target; what Target is worth on its own; what synergies only we can create, net of integration costs; and whether the price leaves value for us once we allow for risk. I'd start with the rationale, because if the logic fails, the price doesn't matter.
Why: The strong answer states the decision rule before the buckets, so every later number has a home. It pairs synergies with integration costs and says where to start and why. The weak one is a list of topics any candidate could recite.
02Strategic rationale: why buy, why this target
Start here, because a cheap deal with no logic is still a bad deal. The rationale also tells you which synergies to look for: a deal done for scale lives on cost synergies, a deal done for growth lives on revenue synergies.
Then ask buy versus build versus partner. Buying is fastest and gives full control, but it costs the most and is the hardest to undo. If the client could build the same thing in two years for a fraction of the price, the deal has to beat that.
03Standalone value: what the target is worth as it is
Value the target as if nothing changes: its market, its position in that market and the profit it makes today. In an interview that almost always means a multiple of EBITDA, given by the interviewer or taken from comparable companies or deals.
$60m EBITDA × 10 = $600m enterprise value
Before you multiply, sanity-check the EBITDA. Is this year's margin normal or a peak? Is the market growing or shrinking? A target growing 15% a year deserves a higher multiple than one shrinking 5% a year.
04Synergies: cost is likely, revenue is a hope
Synergies are the extra profit the two businesses make together that neither makes alone. Split them into cost and revenue, because they deserve very different levels of trust.
Why revenue synergies get overstated
- Customers don't follow the plan. Cross-selling assumes customers want both products from one supplier. Many don't.
- Revenue is not profit. $100m of extra sales at a 20% contribution margin is $20m of EBITDA, not $100m.
- Dis-synergies get ignored. Some customers leave when a supplier is bought, especially if they compete with the buyer.
- Competitors react. Push a new range through your channel and rivals cut prices or fight for the same shelf space.
- The estimates come from the people selling the deal. A synergy number in a pitch is built to justify a price.
Then subtract integration costs: the one-off cost of getting the synergies, such as severance, IT migration, site closures and rebranding. They are real cash, paid up front, and candidates forget them.
05Price: the most you should pay
Net synergies: value of run-rate synergies minus one-off integration costs
Any price above that number destroys value for the buyer, however good the strategy sounds. Any price below it splits the synergies between buyer and seller: the premium over standalone value is the share of the synergies you hand to the seller.
Pay $680m for a target worth $600m on its own, with $250m of net synergies, and you've given the seller $80m, about a third of the synergies, and kept $170m. Pay $850m and you've given it all away: the deal works, but only for the seller.
A quick way to value synergies in a case is to capitalise them at the target's multiple: $20m a year of run-rate cost synergies at 10× is worth $200m. That's generous, because synergies take time to arrive and some never do, so mention that in real life you'd discount for timing.
Check yourself
Target's standalone value is $300m. You expect $10m a year of run-rate cost synergies, valued at 8×, and $20m of one-off integration costs. What is the most the client should pay?
06Worked example: is $780m worth paying?
Worked example
A snack maker buying a healthy-snacks brand
The prompt. Our client, a large packaged-snacks maker, wants to buy a fast-growing healthy-snacks brand. The seller is asking $780m. Should the client pay it?
1. Standalone value
Target has $400m of revenue at a 15% EBITDA margin: $60m of EBITDA. Comparable listed companies trade at 10× EBITDA, so Target is worth $600m on its own. The ask is a $180m premium, 30% above standalone value.
2. Cost synergies
- Purchasing: 3% off the $200m of ingredients and packaging both companies buy = $6m
- One head office instead of two = $10m
- Closing Target's smallest plant and moving its volume into the client's plants = $4m
- Total: $20m a year at run rate
3. Revenue synergies
Management says the client's distribution will add $100m of sales for Target's range. At a 20% contribution margin that's $20m of EBITDA. We halve it to $10m, because it depends on retailers giving Target's range shelf space and on the client's shoppers trying a brand they don't know.
4. Maximum price
5. Compare with the ask
At $780m, the client keeps $70m of value ($850m - $780m) and hands the seller $180m of the $250m net synergies: 72%. The deal clears, but not by much.
Now test the weakest assumption. With no revenue synergies at all, the maximum is $600m + $200m - $50m = $750m, below the ask. So the deal needs $30m of revenue synergy value: $3m of EBITDA, or $15m of extra sales at 20%. That's 15% of management's $100m plan.
Notice what the haircut did. Without it, the maximum would have been $950m and $780m would have looked like a bargain.
07Risks and integration
A deal can be right on paper and still fail in the first year. Name the risks that hit your numbers, not a generic list, and say how you'd reduce each one.
On integration, interviewers want to hear that you'd protect the base business first: keep the customers and key staff, then chase synergies. A synergy plan that drives out the target's best salespeople can destroy more value than it creates.
08Private equity buyer or strategic buyer
A strategic buyer is a company in the same or a related business. A private equity (PE) fund buys a company to own it for a few years, improve it and sell it. Same target, different maths.
Because a strategic buyer can count synergies, it can usually afford to pay more than a PE fund for the same target. PE funds compete with borrowed money and operational improvement instead.
How a PE return is built
A fund buys Target for $600m, with $360m of debt and $240m of its own equity. Over five years it grows EBITDA from $60m to $80m and pays the debt down to $200m, then sells at the same 10× multiple.
Of the $360m equity gain, $200m came from EBITDA growth ($20m × 10) and $160m from paying down debt. The multiple didn't move, so nothing came from multiple expansion. A good PE answer names which lever does the work.
Check yourself
A fund invests $200m of equity and sells its stake five years later for $600m. Roughly what IRR did it earn?
Cheat sheet
The lines worth rereading the night before.
- 1One test: pay less than standalone value plus net synergies, or walk away.
- 2Rationale first. It tells you which synergies to look for and whether buying beats building.
- 3Standalone value is usually EBITDA × a multiple. That's enterprise value; subtract net debt for the equity price.
- 4Count cost synergies close to in full. Count revenue synergies at contribution margin, then haircut them.
- 5Subtract one-off integration costs. Most candidates forget them.
- 6The premium over standalone value is the share of the synergies you give the seller. Say it as a percentage.
- 7Find the assumption the deal hangs on and size it: 'without revenue synergies, the most we'd pay is $750m.'
- 8PE buyers judge on IRR and money multiple: 2× in five years ≈ 15%, 3× in five years ≈ 25%.
Now drill it
Reading builds the model; drills make it automatic. Start with the first topic, easiest drills first.
Read the full guide
The same ground on the blog, with more worked examples and practice on the page.
Questions candidates ask
What is the framework for an M&A case interview?
Structure it around one test: is the target worth more to the client than the price? Check the strategic rationale, the target's standalone value, the synergies net of integration costs, and the price and risks. Start with the rationale, because if the logic fails the numbers don't matter.
How do you value synergies in a case interview?
Estimate the run-rate profit impact each year, counting revenue synergies at contribution margin and haircutting them. Capitalise the total at the target's multiple as a quick approximation, then subtract one-off integration costs. Mention that in reality you'd discount for the time synergies take to arrive.
Why are revenue synergies less reliable than cost synergies?
Cost synergies are mostly in the buyer's control: it decides to merge head offices or combine purchasing. Revenue synergies depend on customers buying more and competitors not responding, and some customers leave after a deal. That's why you count them at margin and then cut them.
How much of the synergies should a buyer pay away?
As little as possible, and never all of them. The premium over standalone value is the share you hand the seller, so state it as a percentage of net synergies. If a price only works when every synergy arrives on time, it's too high.
How is a private equity case different from a corporate M&A case?
A PE fund usually has no synergies to count, so it judges a deal on its return: IRR and money multiple at a realistic exit. Its levers are profit growth, debt paydown and the exit multiple. A strategic buyer asks whether the target is worth more to it than the price.