Ace Your M&A Case Study Using These 5 Key Steps

Last Updated November, 2022

Mergers and acquisitions (M&A) are high-stakes strategic decisions where a firm(s) decides to acquire or merge with another firm. As M&A transactions can have a huge impact on the financials of a business, consulting firms play a pivotal role in helping to identify M&A opportunities and to project the impact of these decisions.

M&A cases are common case types used in interviews at McKinsey, Bain, BCG, and other top management consulting firms. A typical M&A case study interview would start something like this:

The president of a national drugstore chain is considering acquiring a large, national health insurance provider. The merger would combine one company’s network of pharmacies and pharmacy management business with the health insurance operations of the other, vertically integrating the companies. He would like our help analyzing the potential benefits to customers and shareholders.

M&A cases are easy to tackle once you understand the framework and have practiced good cases. Keep reading for insights to help you ace your next M&A case study interview.

In this article, we’ll discuss:

Why mergers & acquisitions happen.
Real-world M&A examples and their implications.
How to approach an M&A case study interview.
An end-to-end M&A case study example.

Let’s get started!

Why Do Mergers & Acquisitions Happen?

There are many reasons for corporations to enter M&A transactions. They will vary based on each side of the table.

For the buyer, the reasons can be:

Driving revenue growth. As companies mature and their organic revenue growth (i.e., from their own business) slows, M&A becomes a key way to increase market share and enter new markets.
Strengthening market position. With a larger market share, companies can capture more of an industry’s profits through higher sales volumes and/or greater pricing power, while vertical integration (e.g., buying a supplier) allows for faster responses to changes in customer demand.
Capturing cost synergies. Large businesses can drive down input costs with scale economics as well as consolidate back-office operations to lower overhead costs. (Example of scale economies: larger corporations can negotiate higher discounts on the products and services they buy. Example of consolidated back-office operations: each organization may have 50 people in their finance department, but the combined organization might only need 70, eliminating 30 salaries.)
Undertaking PE deals. Private equity firms will buy a majority stake in a company to take control and transform the operations of the business (e.g., bring in new top management or fund growth to increase profitability).
Accessing new technology and top talent. This is especially common in highly competitive and innovation-driven industries such as technology and biotech.

For the seller, the reasons can be:

Accessing resources. A smaller business can benefit from the capabilities (e.g., product distribution or knowledge) of a larger business in driving growth.
Gaining needed liquidity. Businesses facing financial difficulties may look for a well-capitalized business to acquire them, alleviating the stress.
Creating shareholder exit opportunities. This is very common for startups where founders and investors want to liquidate their shares.

There are many other variables in the complex process of merging two companies. That’s why advisors are always needed to help management to make the best long-term decision.

Real-world Merger and Acquisition Examples and Their Implications

Let’s go through a couple recent merger and acquisition examples and briefly explain how they will impact the companies.

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KKR Acquisition of Ocean Yield

KKR, one of the largest private equity firms in the world, bought a 60% stake worth over $800 million in Ocean Yield, a Norwegian company operating in the ship leasing industry. KKR is expected to drive revenue growth (e.g., add-on acquisitions) and improve operational efficiency (e.g., reduce costs by moving some business operations to lower-cost countries) by leveraging its capital, network, and expertise. KKR will ultimately seek to profit from this investment by selling Ocean Yield or selling shares through an IPO.

ConocoPhillips Acquisition of Concho Resources

ConocoPhillips, one of the largest oil and gas companies in the world with a current market cap of $150 billion, acquired Concho Resources which also operates in oil and gas exploration and production in North America. The combination of the companies is expected to generate financial and operational benefits such as:

Provide access to low-cost oil and gas reserves which should improve investment returns.
Strengthen the balance sheet (cash position) to improve resilience through economic downturns.
Generate annual cost savings of $500 million.
Combine know-how and best practices in oil exploration and production operations and improve focus on ESG commitments (environmental, social, and governance).

How to Approach an M&A Case Study Interview

Like any other case interview, you want to spend the first few moments thinking through all the elements of the problem and structuring your approach. Also, there is no one right way to approach an M&A case but it should include the following:

Breakdown of value drivers (revenue growth and cost synergies)
Understanding of the investment cost
Understanding of the risks. (For example, if the newly formed company would be too large relative to its industry competitors, regulators might block a merger as anti-competitive.)

Example issue tree for an M&A case study:

Value drivers
- Revenue: How will the transaction generate revenue growth?
  - Will the deal allow them to expand into new geographies or product categories?
  - Will each of the companies be able to cross-sell the others’ products?
  - Will they have more leverage over prices?
- Costs: How will the transaction create cost synergies?
  - Will it lower input costs?
  - Decrease overhead costs?
Investment required
- How much will the investment cost?
- Will the value of incremental revenues and/or cost savings generate incremental profit?
- What is the payback period or IRR (internal rate of return)?
Risks
- What are the regulatory risks that could prevent the transaction from occurring?
- How will competitors react to the transaction?
- What will be the impact on the morale of the employees? Is the deal going to impact the turnover rate?

An End-to-end BCG M&A Case Study Example

Case prompt:

Your client is the CEO of a major English soccer team. He’s called you while brimming with excitement after receiving news that Lionel Messi is looking for a new team. Players of Messi’s quality rarely become available and would surely improve any team. However, with COVID-19 restricting budgets, money is tight and the team needs to generate a return. He’d like you to figure out what the right amount of money to offer is.

First, you’ll need to ensure you understand the problem you need to solve in this M&A case by repeating it back to your interviewer. If you need a refresher on the 4 Steps to Solving a Consulting Case Interview, check out our guide.

Second, you’ll outline your approach to the case. Stop reading and consider how you’d structure your analysis of this case. After you outline your approach, read on and see what issues you addressed, and which you didn’t consider. Remember that you want your structure to be MECE and to have a couple of levels in your Issue Tree.

Example M&A Case Study Issue Tree

Should we hire Messi onto the team? If so, for how much?
- Will the acquisition be profitable?
  - Revenue: What are the incremental ticket sales? Jersey sales? TV/ad revenues?
  - Costs: What are the acquisition fees and salary costs?
- Will competitors respond?
  - How will the competitors respond? Will this start a talent arms race?
- Are there significant risks to this acquisition?
  - Will his goal contribution (the core success metric for a soccer forward) stay high?
  - Age / Career Arc? – How many more years will he be able to play?
  - Will he want to come to this team?
  - Are there cheaper alternatives to recruiting Messi?
  - Language barriers?
  - Injury risk (could increase with age)
  - Could he ask to leave our club in a few years?
  - Style of play – Will he work well with the rest of the team?

Analysis of an M&A Case Study

After you outline the structure you’ll use to solve this case, your interviewer hands you an exhibit with information on recent transfers of top forwards.

In soccer transfers, the acquiring team must pay the player’s current team a transfer fee. They then negotiate a contract with the player.

From this exhibit, you see that the average transfer fee for forwards is multiple is about $5 million times the player’s goal contributions. You should also note that older players will trade at lower multiples because they will not continue playing for as long.

Based on this data, you’ll want to ask your interviewer how old Messi is and you’ll find out that he’s 35. We can say that Messi should be trading at 2-3x last season’s goal contributions. Ask for Messi’s goal contribution and will find out that it is 55 goals. We can conclude that Messi should trade at about $140 million.

Now that you understand the up-front costs of bringing Messi onto the team, you need to analyze the incremental revenue the team will gain.

Calculating Incremental Revenue in an M&A Case Example

In your conversation with your interviewer on the value Messi will bring to the team, you learn the following:

The team plays 25 home matches per year, with an average ticket price of $50. The stadium has 60,000 seats and is 83.33% full.
Each fan typically spends $10 on food and beverages.
TV rights are assigned based on popularity – the team currently receives $150 million per year in revenue.
Sponsors currently pay $50 million a year.
In the past, the team has sold 1 million jerseys for $100 each, but only receives a 25% margin.

Current Revenue Calculation:

Ticket revenues: 60,000 seats * 83.33% (5/6) fill rate * $50 ticket * 25 games = $62.5 million.
Food & beverage revenues: 60,000 seats * 83.33% * $10 food and beverage * 25 games = $12.5 million.
TV, streaming broadcast, and sponsorship revenues: Broadcast ($150 million) + Sponsorship ($50 million) = $200 million.
Jersey and merchandise revenues: 1 million jerseys * $100 jersey * 25% margin = $25 million.
Total revenues = $300 million.

You’ll need to ask questions about how acquiring Messi will change the team’s revenues. When you do, you’ll learn the following:

Given Messi’s significant commercial draw, the team would expect to sell out every home game, and charge $15 more per ticket.
Broadcast revenue would increase by 10% and sponsorship would double.
Last year, Messi had the highest-selling jersey in the world, selling 2 million units. The team expects to sell that many each year of his contract, but it would cannibalize 50% of their current jersey sales. Pricing and margins would remain the same.
Messi is the second highest-paid player in the world, with a salary of $100 million per year. His agents take a 10% fee annually.

Future Revenue Calculation:

60,000 seats * 100% fill rate * $65 ticket * 25 games = $97.5 million.
60,000 seats * 100% * $10 food and beverage * 25 games = $15 million.
Broadcast ($150 million*110% = $165 million) + Sponsorship ($100 million) = $265 million.
2 million new jerseys + 1 million old jerseys * (50% cannibalization rate) = 2.5 million total jerseys * $100 * 25% margin = $62.5 million.
Total revenues = $440 million.

This leads to incremental revenue of $140 million per year.

Next, we need to know the incremental annual profits. Messi will have a very high salary which is expected to be $110 million per year. This leads to incremental annual profits of $30 million.
With an upfront cost of $140 million and incremental annual profits of $30 million, the payback period for acquiring Messi is just under 5 years.

Presenting Your Recommendation in an M&A Case

Messi will require a transfer fee of approximately $140 million. The breakeven period is a little less than 5 years.
There are probably other financial opportunities that would pay back faster, but a player of the quality of Messi will boost the morale of the club and improve the quality of play, which should build the long-term value of the brand.
As such, we recommend proceeding with the transfer while considering the following:
- Further due diligence on incremental revenue potential.
- Messi’s ability to play at the highest level for more than 5 years.
- Potential for winning additional sponsorship deals.

5 Tips for Solving M&A Case Study Interviews

In this article, we’ve covered:

The rationale for M&A.
Recent M&A transactions and their implications.
The framework for solving M&A case interviews.
AnM&A case study example.

Still have questions?

If you have more questions about M&A case study interviews, leave them in the comments below. One of My Consulting Offer’s case coaches will answer them.

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