M&A terms interviewers expect you to know

Merger model interviews work the same way LBO interviews do: the model itself is learnable from a template, so the interviewer probes the vocabulary around the deal instead. You walk through accretion dilution cleanly, and then the follow-up is "would it still be accretive all in cash?" or "what happens to the target's deferred revenue?" and the template stops helping. This is the short list of deal terms that carry those follow-up chains, what each one means, and why anyone cares.

Accretion and dilution

A deal is accretive if the acquirer's pro forma earnings per share come out higher than its standalone EPS, and dilutive if they come out lower. The math is one fraction: combined net income after deal adjustments, divided by the new share count. The adjustments are where people get marked down, because three of them are easy to forget: synergies (net of costs to achieve them), new interest expense on any debt raised to fund the deal, and foregone interest on any cash spent. All three change the numerator, and stock consideration changes the denominator. The full adjustment list is on the accretion dilution formula page, and the why behind those three adjustments has its own page.

There's a shortcut worth knowing for all-stock deals: compare earnings yields, which is just the inverse of P/E. If the acquirer trades at a higher P/E than it's paying for the target, the deal is accretive, because it's funding cheap earnings with expensive currency. Interviewers like the shortcut because it shows you understand the mechanism rather than the spreadsheet.

Two traps ride along with this topic. First, "this deal is accretive" and "this deal is a good deal" are different statements, and interviewers set that trap deliberately: overpaying can still be accretive if the financing is cheap enough. The distinction has its own page. Second, an all-cash deal is not automatically accretive. The incremental depreciation and amortization from writing the target's assets up to fair value can swamp the earnings you just bought, which is exactly the mechanism in when can an all-cash deal be dilutive.

Earn-outs

An earn-out is a portion of the purchase price the seller only receives if the business hits agreed targets after closing, usually revenue or EBITDA over one to three years. It exists to bridge a valuation gap: the seller believes the hockey stick, the buyer doesn't, and instead of arguing they make part of the price contingent on who turns out to be right.

You'll see earn-outs most in private deals, founder sales, and anywhere projections are the whole story, like a biotech with milestone payments. They cut both ways. The seller stays motivated through the transition, but earn-outs are also a famous source of disputes, because the buyer controls the business while the seller's payout depends on how it's run. One accounting note that comes up in interviews: an earn-out is recorded at fair value as a liability on the day the deal closes, and gets re-measured through earnings afterward, so a company can book a gain because its acquisition is missing its targets. Definition and mechanics: what is an earn-out.

Trading comps vs. precedent transactions

Trading comps value a company off what similar public companies trade for today. Precedent transactions value it off what buyers actually paid for similar companies in past deals. Same multiples, different question: what is this worth on the open market, versus what has someone paid to own one of these outright.

The follow-up is always why precedents run higher, and the answer has two parts. Deal prices embed a control premium, because the buyer is paying for the right to run the company, and they often embed expected synergies, because a strategic buyer will pay away part of what the combination is worth. There's a third, quieter reason: each precedent is frozen at its announcement date, so a deal struck in a hot financing market carries that market's prices with it. The comparison has its own page, and control premiums are covered in depth in the leveraged finance terms guide and on the control premium page.

Goodwill, start to finish

Goodwill is the excess of the purchase price over the fair value of the target's net identifiable assets. It's the accounting system admitting that the buyer paid for things no balance sheet line captures: the customer relationships that don't qualify as separable intangibles, the workforce, the strategic position, and sometimes just the overpayment.

The follow-up chain on goodwill is long enough that each link has its own page:

The target's existing goodwill doesn't carry over. It gets wiped in the deal, and a brand new goodwill number is computed from this transaction's price, covered here.

Goodwill is not amortized under current US GAAP or IFRS. It sits on the balance sheet and gets tested for impairment at least annually, which is why a big write-down years after a deal is the market's receipt for overpaying. Details on the amortization question.

If the fair value of net assets acquired exceeds the price, you get negative goodwill, which current GAAP treats as a bargain purchase gain that flows straight through the income statement. It usually means a distressed or forced seller, and it should make you suspicious of the asset values before it makes you impressed with the buyer. Negative goodwill page.

Goodwill is only tax deductible when the deal is an actual or deemed asset purchase, where the buyer gets a stepped-up tax basis and amortizes tax goodwill over 15 years under Section 197. In a plain stock purchase there's no step-up and no deduction, which is a real economic difference between deal structures, not accounting trivia. When is goodwill tax deductible.

The purchase accounting ripples

Purchase accounting re-marks the target's balance sheet to fair value at closing, and two of those re-marks show up in later interview questions.

Writing up tangible and intangible assets creates incremental depreciation and amortization, which drags on pro forma earnings for years. That's the mechanism behind all-cash deals turning dilutive, and it also creates deferred tax liabilities in a stock deal, because the book basis stepped up while the tax basis didn't. Whether those DTLs belong in the enterprise value bridge is a genuine two-sided debate, and that page gives both sides.

Deferred revenue gets re-measured too, and classically it gets a haircut: fair value is the cost to fulfill the remaining obligation plus a normal margin, which is less than the cash the target collected. The result is revenue the target already sold that the combined company never gets to report. The mechanics are on the deferred revenue write-down page. If you want a differentiator: a recent US GAAP update (ASU 2021-08) now has acquirers book most acquired deferred revenue as the target would have, which largely ends the haircut for US deals, while IFRS still fair-values it. Knowing the classic answer and the update is exactly the kind of one-two that reads as real preparation.

How these actually come up

Rarely as definitions. The standard chain starts with "walk me through whether this deal is accretive," and then branches based on your answer. Mention the share count and you may get the all-stock earnings yield shortcut. Mention cash and you'll get asked about foregone interest, then about the write-up D&A that can flip the answer. Mention goodwill and the chain runs through the target's old goodwill, impairment, and tax deductibility. Every term in this guide is a branch on that tree, which is why practicing them as isolated flashcards undersells what they're for.

Each term here is a standalone question with a full answer in the M&A question bank, asked the way interviewers actually phrase it.

FAQ

Is an accretive deal a good deal? Not necessarily, and interviewers ask precisely because the words sound alike. Accretion is an EPS arithmetic fact driven heavily by financing cost. A buyer can overpay badly and still show accretion if debt is cheap, and a genuinely value-creating deal can screen dilutive in year one.

Why do precedent transactions show higher multiples than trading comps? Deal prices include a control premium and often a share of expected synergies, while trading prices are for passive minority stakes. Each precedent also reflects the financing conditions of its own announcement date.

Is an earn-out debt? No. It's contingent consideration, recorded as a liability at fair value and re-measured through earnings. In practice people treat it as debt-like in negotiations and sometimes in the EV bridge, but it isn't borrowed money and it may never be paid.

What happens to the target's goodwill in a deal? It disappears. Goodwill is not an acquirable asset, so the target's legacy balance is eliminated and a new goodwill figure is calculated from this deal's purchase price and this deal's fair values.