PE case: look into "standalone value" or "investment value"?

Question

I've recently done several PE case (should client acquire X company and what would be a reasonable price), and most cases only consider “standalone target company value” instead of “investment value (including synergy). It is quite different from what I have expected - shouldn't most PE firms acquire a target company because they want to do operation improvement or market consolidation”?

I have also visited Bain's typical private equity due diligence framework, where the focus is on: market attractiveness, company attractiveness, competitive environment, and feasibility & profitable exit. Again, potential synergy is not included in the framework.

Could you advice on whether it's important to assess “potential synergy” in a typical PE case? Is it recommended to clarify first with the interviewer, “should we focus on standalone company value”?

Appreciate any thoughts.

Answer 1

Hello!

I did plenty of M&A DDs when I was in McKinsey, and I can tell you that indeed the synergy calculation part was massive in all the cases (at least in the part that McK took care of). Hence, yes, it´s fundamental to have it in an M&A´s case issue tree.

I have good examples, feel free to PM me.

Hope it helps!

Cheers,

Clara

Answer 2

1. If you have nothing on the prompt regarding merging into another company, you can assume there are no synergies to consider.

2. You should not ask "should we focus on standalone company value?”. This can lead to an akward conversation (that ends with the intervier asking you how you would calculate synergies without another company, or why are you assuming that there is another company). If you want to play on the safe side, the clarification question (although I don't think it is necessary in this case), is asking if they already have another company with which they plan to merge.

Be careful with assuming things that are not on the prompt without specifically stating them.

3. Regarding this comment: shouldn't most PE firms acquire a target company because they want to do operation improvement or market consolidation”?

This is not true. There are many possible investment thesis (cost cutting, operational improvement, split into multiple businesses, market or geographical expansion, etc.). Some PE follow Buy & Build strategies, and occasionally they may pursue a specific merger.

But to be honest, mergers are much more frequently led by corporates than by PE.

Answer 3

Hi there,

There are a lot of questions here! Let me try and simplify it by using a house metaphor. PE firms really make acquisitions for 3 reasons:

1) To flip the house

2) As a fixer-upper

3) To split it into 2 plots or combine a few lots into 1

So, “syngergies” bucket doesn't really apply when it's a PE firm. Rather “how can I improve the company” does.

Make sense?

Answer 4

Hi!

Synergies are a crucial part of an M&A case and real-life project.

Definitely include it in your structure.

Hope this helps.

Best,

Anto

Answer 5

The synergies you are referring to are applicable when the M&A is like-for-like - one petchem company acquiring/merging another petchem company. In such a case, the M&A transaction is pinned on financial aspects (NPV etc.) and non-financial aspects (synergies etc.).

In a PE acquisition - the transaction is purely financial. The PE will acquire the target company and then seek to implement business improvements to improve their RoI. There will not be any synergies in the target company with the PE because a PE is simply a fund vehicle. Hence in the case of a PE M&A you evaluate the target standalone.

The only synergies in PE will be that if there are similar companies already existing in the PE's portfolio. This would mean that the PE has expertise in managing the new acquisition and it increases the reliability with which they can turn it around and improve their RoI.