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Happy Wednesday, future bankers!

Markets closed relatively flat yesterday. But a whopping 300 companies reported earnings, most of which came after hours.

🚀 Let’s get into it.

🔢 Technical Question

“Can you walk me through the basics of a merger model?”

A basic merger model helps us understand the financial impact of two companies joining forces. Let's walk through the key steps:

1. Inputs and Assumptions:

• Financial Statements: Gather historical financial data like Income Statements, Balance Sheets, and Cash Flow Statements for both companies.

• Valuation Inputs: Estimate the offer price per share for the acquired company or the combined company value.

• Acquisition Structure: Decide if the deal is a stock acquisition, cash acquisition, or a mix of both.

• Synergies: Predict potential cost savings, revenue growth, or other financial benefits from the merger.

• Other Assumptions: Account for transaction costs, financing costs, and any accounting adjustments.

2. Combining Financials:

• Create a Combined Income Statement: Add together the revenue, expenses, and earnings of both companies for each period.

• Apply Purchase Price Accounting (PPA) if applicable, which involves calculating goodwill and adjusting asset values.

3. Pro Forma Adjustments:

• Consider the impact of financing: Account for interest expense on new debt or issuance of new shares.

• Factor in synergies: Adjust revenue or expenses based on your predictions.

• Reflect any one-time transaction costs.

4. Analysis and Outputs:

• Calculate the combined Earnings per Share (EPS): Divide the combined net income by the total number of outstanding shares.

• Analyze accretion/dilution: See if the EPS of the combined company increases or decreases after the merger.

• Look at other key metrics like debt-to-equity ratio and return on invested capital (ROIC) to assess financial health.

5. Sensitivity Analysis:

• Test the model under different assumptions for valuation, synergies, and financing options to understand the range of potential outcomes.

Remember, this is a simplified overview. Complex mergers involve more intricate adjustments and considerations. Building a full model requires financial modeling skills and software proficiency. However, understanding these basic steps gives you a good foundation for grasping the logic behind merger modeling.

🗣 Behavioral Question

"If you had a beta, what would it be?"

This question can be a tricky one in an interview.

In this instance, “Beta” is referring to the part of the Capital Asset Pricing Model (commonly referred to as the CAPM) that measures the expected risk and return of a security.

The higher the beta, the higher potential return, but it also means that you’re taking on more risk. A beta of 1.0 is in correlation with the market, whereas a beta of 2.0 means that the security moves double that of the market—in both directions.

To respond to the question, you probably want to say something in between 1.0 and 2.0.

Something above 1.0 would indicate that you’re willing to try new things, get out of your comfort zone, and think outside the box—even if you fail from time to time.

However, it’s probably best to stay away from anything over 2.0. Stating a beta over 2.0 easily be interpreted as being reckless and care-free. It implies that your mistakes could be large and painful.

Essentially, banks aren’t looking to hire an emotional roller coaster. At the end of the day, they really just want the work done.

🗞 Industry News

Netflix Bounces Back with Subscriber Surge and New Plans

Netflix capped off a successful 2023 with another quarter of explosive subscriber growth, adding a record 13.1 million customers in the final three months. This comeback year saw Netflix navigate price hikes and crack down on password sharing, all while rolling out a cheaper ad-supported tier.

The streaming giant's diverse content offerings, including hits like "Beef" and "Maestro," proved a draw for viewers. With over 260 million subscribers by year-end, Netflix has doubled down on its growth strategy, eyeing live programming like WWE's "Raw" and experimenting with gaming to keep the momentum going.

Netflix's financial performance also impressed Wall Street, with revenue exceeding analyst estimates despite falling short on earnings per share. The ad-supported tier is already a hit, making up 40% of new signups in available markets. While confident in its subscriber growth plans, Netflix anticipates several years before advertising offers substantial revenue.

Overall, Netflix has successfully reinvigorated its growth and proven its adaptability in a competitive streaming landscape. Its focus on diversifying content, exploring new revenue streams, and tackling password sharing looks to have paid off.