M&A

Question

Hi!

I have already cased a lot however M&A cases are still my weakness even though they should be kinda straight forward. Could you please tell me which framework you have actually used ? It feels difficult to find a structure that is actually mece but also really answers the questions in a nice and clear way. I somehow find it random for example to have value of company in a different bucket than synergies as then you cannot just say within 1 bucket if the acquisition is financially attractive? Or is this still fine? It would be amazing to just get a rough idea of how it could be structured in a comprehensive but nice way so that the financial part is within 1 bucket? I am preparing for Mckinsey so it needs to be comprehensive.

Thank you!

Answer 1

Hello, a clean structure I have seen work well for M&A cases is the following (this is also how you would approach an M&A project or DD in real life):

Strategic rationale: why this target? I.e. does it fill a real gap (access to a product, a market, a capability)? This is the qualitative fit and the reason the deal exists in the first place (what is typically referred to as "investment thesis")
Financial attractiveness: is the target worth more to you than what you pay for it? This is the single bucket that answers whether the deal makes sense, and it builds in three steps:
a. First, value the target standalone, as if nothing changes (DCF or multiples)
b. Then add synergies on top, split into revenue and cost, net of the cost to achieve them and risk-adjusted (you rarely capture 100%, so haircut them). This is where the value creation sits
c. Standalone value plus synergies gives you the ceiling, the most you can pay and still create value. Compare your price against that, whether it is a fixed ask or what you bid in a competitive process
Risks and feasibility: what could stop you capturing the value in point 2? I.e. integration, regulatory, cultural, financing. This is the reality check on the upside you just sized

Hope it helps. Feel free to drop me a message if anything is unclear and good luck with the prep!