In this article
Motives and basics
What is the difference between a merger and an acquisition?
In an acquisition one company buys control of another, which usually keeps running as a subsidiary or is absorbed. In a merger two companies combine into one legal entity, and under Delaware law the board of each company must approve the agreement and declare it advisable (Delaware Code, title 8, section 251). Interviewers use the words loosely, since most deals are priced and negotiated as purchases.
Why it is asked: it checks that you separate legal form from commercial reality. Related: investment banking interview questions.
Why do companies buy other companies?
They buy to gain scale, growth, a capability or a market they cannot build quickly. Damodaran's lecture slides split the benefit into operating synergy, such as cost savings and higher growth, and financial synergy, such as tax benefits and added debt capacity (Damodaran, 2022). A good answer names the motive and says what would have to be true for the deal to pay.
Why it is asked: motives decide how a deal should be valued. Read the full explanation: synergies in a merger model.
What is synergy, and why is it risky to pay for it?
Synergy is the extra value created when two firms combine, above the sum of their separate values. The same slides say acquirers tend to overestimate synergy and control and then have a hard time delivering the promised benefits, and that cost synergies are more likely to arrive than growth synergies (Damodaran, 2022). Paying the full value of synergy to the seller leaves nothing for your own holders.
Why it is asked: it tests skepticism about deal logic. Read the full explanation: synergies in a merger model.
Valuation
How do you value a target company?
Use several methods and compare. A discounted cash flow (DCF) values the target's own forecast cash flows, trading comparables apply the multiples of similar listed companies, and precedent transactions apply the multiples paid in past deals for similar targets. A leveraged buyout (LBO) analysis adds a fourth range: the most a financial buyer could pay and still earn its required return. The ranges set the valuation band; the negotiating zone lies between the seller's minimum and the buyer's maximum. Name the assumption that moves each most.
Why it is asked: it separates a formula from a judgment. Read the full explanation: financial modeling interview questions.
What is a control premium, and how do you calculate it?
A control premium is the extra price an acquirer pays above the target's unaffected market value (its price before news of the deal) for control of the business. It equals the offer price divided by the unaffected price, minus one. In an illustrative deal where the target's equity is worth 720 million at market and the offer is 900 million, the premium is 25.0%.1
Why it is asked: it links market price to what a buyer actually pays. Read the full explanation: trading comparables and precedent transactions.
Why do precedent transaction multiples usually run above trading multiples?
Precedent multiples include a control premium and often expected synergies, while trading multiples price minority stakes that carry no control. A target trading at 12 times earnings might sell at 15 once a buyer pays for control, as in the illustrative deal, where 720 million is 12 times earnings of 60 million and 900 million is 15 times.1 The comparison is imperfect, because precedent deals differ in timing, financing and market conditions, so use the range and not a single number.
Why it is asked: it tests whether you know what each multiple contains. Read the full explanation: trading comparables and precedent transactions.
How do you value the synergies in a deal?
Damodaran's three steps are to value each firm alone, add the two values to get the combined value without synergy, then build the synergy into growth and cash flows and revalue the combined firm. The value of synergy is the difference. As a simple case, cost savings of 20 million before tax are 15 million after a 25% tax rate, worth 166.7 million at a 9% discount rate with no growth.1
Why it is asked: it shows whether you can price a claim before paying for it. Related: synergies in a merger model.
How do you decide the most you should pay?
The ceiling is the target's standalone value plus the full value of the synergies you can realistically deliver; at that price your holders only break even, so you bid below it to keep part of the gain. In the illustrative deal the ceiling is 720 + 166.7 = 886.7 million, or 36.94 a share against the 37.50 offer, so the buyer's holders lose 13.3 million of value at the offer.1 A walk-away price well below the ceiling leaves a margin for error, because forecasts of synergy are usually optimistic.
Why it is asked: it tests discipline in pricing. Related: synergies in a merger model.
Knowing it is half the job. Saying it is the other half.
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Start Free Trial →Accretion and dilution
What do accretion and dilution mean?
A deal is accretive if the acquirer's earnings per share (EPS) rise after the deal and dilutive if they fall. The test compares pro forma EPS, the combined net income divided by the combined shares, with the acquirer's EPS before the deal. It is a quick earnings screen. It says nothing about whether the price was fair.
Why it is asked: it is an early number a deal committee asks for. Read the full explanation: accretion and dilution.
Walk me through an accretion and dilution analysis.
Start with each company's net income and shares. Add the target's net income to the acquirer's. Subtract the after-tax cost of the financing, which is interest on new debt or interest foregone on cash. Add any new shares issued to the sellers. Subtract, after tax, new depreciation and amortisation from asset write-ups and the amortisation of financing fees; show one-off advisory fees separately. Add any after-tax synergies you assume. Divide combined net income by combined shares, and compare the result with the acquirer's EPS before the deal.
Why it is asked: it checks that you can build the model, not only name it. Read the full explanation: financial modeling interview questions.
Is a stock deal or a cash deal more accretive?
It depends on the cost of each currency. In the illustrative deal (acquirer EPS 2.00, price 40, target bought at 900 million for 60 million of earnings), all stock lifts EPS by 3.4%, new debt at 6% by 4.9%, cash on hand earning 3% by 9.9%, and a half-and-half mix of stock and debt by 4.1%.1 Cheaper financing is more accretive, and stock is dilutive when its cost, the acquirer's earnings yield (1 ÷ 20 = 5.0% here), exceeds the target's earnings yield at the offer price (6.67%).
Why it is asked: it tests how financing choices move EPS. Read the full explanation: financial modeling interview questions.
Which rule of thumb tells you if an all-stock deal is accretive?
Compare price-to-earnings (P/E) ratios. If the acquirer's P/E is higher than the P/E at which it buys the target, an all-stock deal is accretive, ignoring synergies. Here the acquirer trades at 20 times earnings and buys at 15, so EPS rises 3.4%.1 For debt, the test is whether the target's earnings yield, 6.67% here, exceeds the after-tax cost of debt, 4.5%.
Why it is asked: it is the shortcut interviewers expect without a model. Read the full explanation: the stock-deal shortcut.
How many synergies does a dilutive deal need to break even?
Find the net income the combined company needs to match the old EPS, then divide the shortfall by one minus the tax rate. Pay 1,500 million in stock for the same target and EPS falls 3.2% to 1.94. The combined firm needs 475 million of net income against 460, a gap of 15 million, which is 20 million of pre-tax synergies.1
Why it is asked: it turns a vague claim into a number. Read the full explanation: accretion and dilution.
Can an accretive deal still destroy value?
Yes. Accretion measures earnings per share, not the value paid against the value received. A deal can lift EPS and still cost more than the target is worth, as in the example where the premium of 180 million exceeds the 166.7 million of synergy.1 Damodaran's slides add that firms growing through acquisitions have generally had more trouble creating value than those investing internally (Damodaran, 2022).
Why it is asked: it separates earnings optics from economics. Read the full explanation: accretion and dilution.
Text description of the diagram
- All stock lifts earnings per share from 2.00 to 2.07 and new debt to 2.10 in the illustrative deal.
- Cash on hand lifts it to 2.20, and an all-stock deal at 1,500 million cuts it to 1.94.
Accounting
What is goodwill, and how does it arise?
For a 100% purchase, goodwill is the amount by which the consideration transferred exceeds the fair value of the net identifiable assets acquired. Accounting Standards Update (ASU) 2017-01 from the Financial Accounting Standards Board (FASB) refers to consideration transferred in excess of the fair value of the net assets acquired, and that excess is what goodwill captures (FASB, ASU 2017-01). With a price of 900 million and identifiable net assets of 540 million at fair value, goodwill is 360 million.1
Why it is asked: it links the deal price to the balance sheet. Read the full explanation: goodwill.
How do you tell a business combination from an asset purchase?
Under the screen in Accounting Standards Codification 805, if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar assets, the set is not a business (FASB, ASU 2017-01). Buying one brand, one building or one patent is therefore usually an asset purchase, and goodwill arises only in a business combination.
Why it is asked: it tests knowledge of the accounting rule behind the deal. Read the full explanation: goodwill and the purchase price.
Process, legal and closing questions
What approvals does a merger need?
For a Delaware corporation, the board adopts a resolution approving the merger agreement and declaring it advisable, and the agreement is then adopted by a majority of the outstanding stock entitled to vote, with at least 20 days' notice of the meeting (Delaware Code, title 8, section 251). Some structures need no vote, such as a merger after a qualifying tender offer for listed companies. Other law governs other places, so state the jurisdiction.
Why it is asked: it checks that you know a deal needs consent as well as a price. Related: how to answer interview questions.
What is a tender offer, and how long must it stay open?
A tender offer is a public offer to buy shares directly from the target's holders at a stated price, without a shareholder meeting. Under Securities and Exchange Commission Rule 14e-1 it must stay open at least 20 business days, and 10 business days after a change in the price or the share percentage sought (Rule 14e-1, as published by Cornell's Legal Information Institute). With no holidays, 20 business days is about four weeks, 26 to 28 calendar days depending on the weekday the offer starts, because the commencement day counts.1
Why it is asked: it tests timing and the route to control. Related: investment banking interview questions.
When does a deal need an antitrust filing in the United States?
When it exceeds the Hart-Scott-Rodino size-of-transaction threshold, which the Federal Trade Commission (FTC) raised in 2026 from 126.4 million to 133.9 million US dollars (FTC, 14 January 2026). Other tests and exemptions apply, and filing fees depend on deal size. In a round, name the threshold idea and say a lawyer confirms the current figures.
Why it is asked: it shows awareness of regulatory timing. Related: investment banking interview questions.
What would you ask a banker or hiring manager about the deals they have worked on?
Ask about the decision, not the headline: why the buyer chose that structure, which valuation method set the price, and what the team would do differently. Questions about the trade-off between price and certainty of closing show that you understand deals as negotiations. Prepare two such questions per interview and avoid anything answered on the firm's website.
Why it is asked: it is a common closing question. Read the full explanation: questions to ask the interviewer.
- A control premium is the offer divided by the unaffected price, minus one; 900 against 720 is 25.0%.
- All-stock accretion follows P/E: buying at 15 times earnings with a 20 times stock lifts EPS 3.4%.
- Accretive is not the same as valuable: a 180 million premium for synergies worth 166.7 million destroys value.
- Goodwill is the price above the fair value of net identifiable assets, 360 million in the example.
- Under Delaware law a merger usually needs board approval and a majority of outstanding voting stock; a tender offer stays open at least 20 business days.
Sources
- Session 24 slides: Value of synergy and acquisition valuation (Valuation, Spring 2022) — Aswath Damodaran, NYU Stern (year only; read 2026-10-24), 1 Jan 2022
- Business Combinations (Topic 805): Clarifying the Definition of a Business, ASU 2017-01 — Financial Accounting Standards Board (January 2017), 1 Jan 2017
- 17 CFR 240.14e-1 Unlawful tender offer practices — Cornell Legal Information Institute (date = read date), 24 Oct 2026
- Delaware Code Title 8, Chapter 1, Subchapter IX: Merger, Consolidation or Conversion — State of Delaware (date = read date), 24 Oct 2026
- FTC Announces 2026 Update of Jurisdictional and Fee Thresholds for Premerger Notification Filings — Federal Trade Commission, 14 Jan 2026
