Project Harrowgate — Merger of Equals
A 2-hour Merger of Equals case study with a complete model answer
Modeled After
Perella Weinberg Partners
An exchange-ratio analysis presented alongside a premia-paid overview — relative value expressed as a ratio with its own trading history rather than as two share prices
Structure and exhibit set are modeled after Perella Weinberg Partners. The companies, the financials and every figure in this case are entirely our own.
The Situation
Harrowgate Industrial Group, Inc. (NYSE: HRG) makes flow-control and motion-control equipment — valves, actuators, pumps and precision drives — for industrial end markets.
Harrowgate Industrial Group, Inc. / Pelham Manufacturing Company
- Sector
- Industrial equipment — flow control and motion control: valves, actuators, pumps and precision drives sold into process, energy, water and general industrial end markets
- Size
- Geography
- United States, both listed on the NYSE, both selling through direct and distributor channels into overlapping geographies but adjacent end markets. The parties do not compete in the same category, and the case does not model a divestiture.
- Ownership
- Situation
The Prompt
You advise the Board of Harrowgate Industrial Group, Inc.
Supporting Materials
What you are handed at the start of the case, in the format a real process would use.
Situation overview and Pelham's written proposal
PDFUnlockReported results and stated drivers, both companies
PDFUnlockMarket data and the exchange-ratio trading record
PDFUnlockManagement's synergy estimate and the cost to achieve
PDFUnlockBlank modeling template
XLSXUnlockAnnounced combinations — raw extract
XLSXUnlock
What You Have to Produce
The deliverables, in the order the committee will read them. The exercise runs 120 minutes.
PART 1
Standalone plans and the calendarized next twelve months
PART 2
Unlevered free cash flow, both sides
PART 3
The at-market exchange ratio and the ownership split
PART 4
Contribution analysis — five metrics, five implied ratios
PART 5
Relative discounted cash flow
PART 6
Screen the precedent extract and build the exchange-ratio range
PART 7
Synergies, and the has/gets
PART 8
Accretion, structure and the social terms
How to Approach It
The order a strong candidate works in, and why. This is the shape of the answer — the finished answer deck, Excel model and memo are in the solution set below.
- 01
Derive the at-market ratio before you build anything else
- 02
Build the ownership split and make the check row unmissable
- 03
Run the contribution analysis and read the spread before the median
- 04
Take the ratio of two valuations, not the difference of two prices
- 05
Screen the extract yourself and build the range in ratio space
- 06
Value the synergies, then show who gets them
- 07
Price the structure and the social terms
- 08
Write the recommendation, including the evidence against it
Key Concepts
The ideas this case is built on. Know these cold and the case becomes a question of execution rather than knowledge.
Exchange ratio
The number of acquirer-side shares a target-side holder receives for each share held. In an all-stock combination it is the entire economics: there is no cash and no price, so the ratio and the share counts determine who owns what. The at-market ratio is simply the two share prices divided, and it is the reference every other ratio is judged against. A ratio above at-market embeds a premium to the receiving side and a ratio below it embeds a discount, whatever the press release says about equals.
Pro forma ownership split
The percentages of the combined company each shareholder base owns after the issuance: one side's existing share count over the sum of that count and the new shares issued. It is the answer to a merger-of-equals question in the way that a price per share is the answer to an acquisition question, which is why the arithmetic deserves a check row struck in absolute percentage points. Percentages that do not sum to 100 are an error in the answer itself, not a presentational untidiness.
Contribution analysis
Each side's share of revenue, EBITDA, EBIT, net income and unlevered free cash flow, set against the share of the combined company it would own. Where a metric sits at enterprise level the construction has to deduct that side's own net debt before comparing per-share values, because an exchange ratio is a trade between shareholders rather than between asset bases; where it already sits after interest, no deduction belongs. That distinction is what allows an equity-level metric and an enterprise-level metric to point in different directions on one set of accounts, and that divergence is information rather than an error to reconcile away.
Has/gets analysis
What each shareholder base gives up and what it receives: standalone market value per share against pro forma value per share, aggregated into a dollar gain and then into a share of the total value the combination creates. It is the exhibit that converts an argument about a ratio into an argument about money. When the share-of-value split and the ownership split describe the same transaction and look nothing like each other, that gap is the premium — expressed in the only way a nil-premium transaction can express one.
Fixed versus floating exchange ratio
A fixed ratio hands over a set number of shares whatever happens to either stock between signing and closing, so the ownership split is preserved and the announced value floats with the issuer's share price. A floating ratio does the reverse: it preserves the headline value per share by adjusting the number of shares, and lets the ownership split move. A merger of equals is an agreement about ownership, so the ratio is normally fixed — but that choice hands market risk to the receiving side, and collars, walk-away rights and top-up mechanics exist to bound how far it can travel.
Walk-away right and the double trigger
A right for one party to terminate if the other's share price falls below a stated level before closing. Written on an absolute decline alone it lets a party abandon a combination that is performing exactly as expected merely because the whole sector de-rated. Written as a double trigger — an absolute decline and underperformance against an agreed index — the right exists only where something has gone wrong with this company rather than with the market. Any top-up that preserves announced value in exchange for more shares should be priced in ownership before it is agreed, because it is a contingent issuance of stock on the worst possible day.
Social issues as deal terms
The name of the combined company, the location of the headquarters, who chairs and who is chief executive, how the board is composed, and how long those arrangements are locked and by what vote they can be amended. In a merger of equals these are substantive rather than decorative, because they are the only currency in the negotiation that is not shares. Board representation set against economic ownership is a measurable concession that costs the conceding side nothing in equity, and a lock with a supermajority amendment threshold is what stops the whole arrangement being revocable by a simple majority within a year.
One declared basis, on both sides
Every relative analysis needs its earnings basis declared once and applied the same way to both parties. Stock-based compensation is the usual offender: expensed by both companies here and added back by neither, which has to be stated rather than assumed. The reason it matters more in a combination than in an acquisition is that the answer is a relative number — an add-back applied to one side moves the ratio directly, and an add-back applied to both still moves it whenever the two companies run the charge at different rates. The same discipline governs purchase accounting, which a merger of equals does create and which any bridge struck before it must disclose, along with the direction of the omission.
What Makes It Hard
The specific traps in this case — the places candidates lose the assessment without noticing.
Check Your Answer
Type the figures you produced and find out how many are right before you open the worked answer. You get a verdict and, where you are off, a pointer to the part of the build to re-check — never the number itself. Everything you type stays on this device.
How to type a figure. Digits, with an optional unit: 1,234.5, $1,234.5, 2.6x, 21.4%. For a negative use (20.0) or -20.0. Enter as many decimals as you carried — precision is never penalised.
What the Case Asked For
The arithmetic is only half of it. Tick off what you actually produced — this half is yours to score, because nothing can grade a written recommendation from a checkbox.
The Model Answer
The worked answer in full: answer deck, Excel model and memo, built the way a banker would actually build them. It is a reference, not a submission — a strong answer under the clock is far shorter.
What the Solution Covers
- —Contribution analysis
- —Exchange ratio determination
- —Football field in exchange-ratio space
- —Ownership split and governance
- —Synergy allocation between shareholder bases
- —Has/gets analysis
Answer Deck
Full model answer, banker-formatted
Memo
The written recommendation and how it was reached
Upgrade to Diamond
Sign up and upgrade to Diamond to unlock the answer deck, the Excel model, the memo and the audio walkthrough.
Get StartedThe Excel Model
The model is linked and tied out end to end — every schedule, every formula and every check, in the file itself.
Downloads are available to Diamond members
Excel Model and PowerPoint Deck and Memo (PDF) and Answer Deck (PDF) — yours to open, edit and rebuild
Walkthrough
A conversational walkthrough of how to approach the case under time pressure — where to start, what to cut, and how the recommendation gets defended.
Audio Walkthrough
How to approach Project Harrowgate — Merger of Equals
60-second preview — upgrade to Diamond for the full walkthrough
Frequently Asked Questions
What is a merger of equals case study in an investment banking interview?
It is an all-stock combination between two companies of similar size in which there is no acquirer, no target and no offer price. Because nothing is being bought, there is no premium in the ordinary sense: the economics reduce to an exchange ratio and the pro forma ownership split it produces. The exercise asks you to derive the ratio the market already implies, test every deviation from it against what each side actually contributes, express your valuation range in exchange-ratio space rather than in dollars per share, and settle the governance and social terms as the deal terms they are. It is the M&A archetype that most rewards judgment and least rewards pattern-matching, because the familiar exhibits either do not apply or have to be rebuilt in a different unit.
How do you calculate the exchange ratio in a merger of equals?
The at-market ratio is the two share prices divided: the receiving company's price over the issuing company's price. That is the ratio at which each side's holders receive exactly the market value they already owned, and it is the only ratio in the analysis that needs no argument. Everything else is a deviation from it. You then test candidate ratios against the evidence: what each side contributes on revenue, EBITDA, EBIT, earnings and cash flow; what a relative discounted cash flow implies; where the ratio has actually traded over the past year; and what premium to the at-market ratio comparable combinations have embedded. A ratio nobody can defend against those four is a ratio that was chosen rather than derived.
What is a contribution analysis and why is it the centerpiece of a merger of equals?
It compares each side's share of a set of forward metrics with the share of the combined company it would own. If a company contributes half the EBITDA and receives forty-seven percent of the equity, it is paying a premium whether or not anyone in the room uses the word. The construction matters: allocate the combined value pool by each side's share of the metric, deduct that side's own net debt where the metric sits at enterprise level, divide by that side's own share count, and take the quotient of the two per-share results. Because four metrics sit at enterprise level and one sits at equity level, the five can diverge, and the spread between them, rather than their median, is what a board needs to see.
Why is there no premium in a merger of equals, and what replaces it?
A premium is a payment over a market price, and in a nil-premium combination nobody is being paid a price. What replaces it is the premium an exchange ratio embeds over the at-market ratio, which is measurable and is what a precedent set of combinations should be screened to measure. Two other things do the work a premium normally does. The first is the ownership split, which says who owns the combined company. The second is the has/gets, which says what share of the value the combination creates each shareholder base walks away with. Those two describe the same transaction, and when they diverge sharply, the divergence is the premium — expressed in the only way this structure can express one.
Does accretion/dilution still matter when there is no acquisition?
Yes, and it has to be run for both shareholder bases rather than one. Pro forma net income is the two standalone earnings streams plus phased synergies; pro forma shares are the issuing company's count plus the new shares. The issuing side compares pro forma EPS with its own standalone EPS in the ordinary way. The receiving side cannot: one of its old shares becomes the exchange ratio's worth of new shares, so its entitlement is the ratio times pro forma EPS, and only that figure is comparable with its standalone EPS. It is also worth solving the ratio at which the combination stops adding to the issuing side's earnings, and solving it again with the synergies switched off, because the gap between those two is the whole synergy program expressed in the unit the negotiation is actually conducted in.
What is a fixed exchange ratio, and who bears the risk between signing and closing?
A fixed ratio delivers a set number of shares regardless of what either stock does before closing, which preserves the agreed ownership split and lets the announced value of the consideration float with the issuing company's share price. The receiving side therefore bears the market risk, and saying so explicitly is the part most often left implicit. A floating ratio would do the opposite, fixing the value and floating the ownership, which is why it is rare in a combination that is fundamentally an agreement about ownership. Collars bound how far the value can move, walk-away rights allow termination past a stated decline — best written as a double trigger so that a sector-wide de-rating does not qualify — and top-up mechanics preserve value at the cost of issuing more shares on the worst possible day, which is why the cost of one should be computed in ownership before it is agreed.
Why are social issues treated as real deal terms in a merger of equals?
Because they are the only currency in the negotiation that is not shares. Who chairs, who is chief executive, how the board is split, what the company is called and where it is headquartered all determine whether the structure the two sides have agreed survives the first contested decision. Board representation set against economic ownership is measurable and a concession there costs the conceding side no equity at all, which makes it simultaneously the cheapest thing to win and the easiest to give away without noticing. The governance lock and the vote required to amend it are what stop the whole arrangement being unwound by a simple majority within a year, which is the difference between a term and a press release.
How should you allocate 120 minutes across a merger-of-equals case?
Across all of it, not the first half. A working budget: about 65 minutes on the model — both plans, the unlevered cash flow, the ratio and the ownership split, the contribution analysis, both discounted cash flows and the earnings bridge; about 30 minutes on the analysis that actually answers the question — screening the extract, assembling the exchange-ratio range, the has/gets and the structural terms; and about 25 minutes on the eight exhibits and the memorandum, which fill no cells at all. The template fills 563 cells and 233 distinct formulas, of which 175 fall in the modeling block, so the honest rate is about twenty-two seconds a formula rather than anything computed on the raw cell count. Build left to right so an error never propagates backwards, and drop the sensitivity grid rather than the write-up if the clock beats you.
About This Merger of Equals Case Study
Merger of Equals case study for investment banking interviews. 120-minute format covering contribution analysis, exchange ratio determination, football field in exchange-ratio space. Includes the full prompt, a model answer deck, a tied-out Excel model, a written memo and an audio walkthrough.
This case study sits in Investment Banking, under Mergers & Acquisitions. Every case ships with the full prompt, the supporting materials, a complete model answer and an audio walkthrough of the judgment behind the recommendation.
120-Minute Format
The time limit a real assessment would give you
Answer Deck
Included in the model answer
Excel Model
Included in the model answer
Memo
Included in the model answer
Audio Walkthrough
How to approach the case under time pressure
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