Client: Northgate Tools, a maker of power tools.
Question: Pellcroft, a smaller rival with a repair service arm, is for sale at $480 million. Should Northgate buy it?
What you have: Pellcroft's earnings, a valuation multiple for similar firms, the synergies Northgate's team expects, and the cost of integration.
Done looks like: the most Northgate should pay, how much of the synergy value the asking price gives away, and a recommendation. All figures are fictional.
An acquisition case asks whether buying a company creates value for the buyer. The logic:
- Standalone value: what the target is worth on its own, often earnings × a multiple for similar firms.
- Synergies: extra profit from combining. Cost synergies (shared warehouses, bigger purchasing) are more reliable than revenue synergies (cross-selling).
- One-off costs: integration costs reduce the value of synergies.
- The most you should pay = standalone value + net synergy value. Every dollar above standalone value hands synergies to the seller.
Interviewers listen for the question "how much of the synergy value are we paying away?" and for skepticism about revenue synergies.