expert
Experte mit der besten Antwort

Sidi

100% Empfehlungsrate

323 Meetings

319 USD / Coaching

# Valuation and M&A cases

HI,

I'm having a lot of trouble trying to understand what is the best mathematical approach to estimate the price of company target of a M&A strategy?

Does an interviewer ask to make calculation on discounting?

Thanks

8 Antworten

• Datum aufsteigend
• Datum absteigend

Antwort auf Frage:

## Evaluating a potential acquisition

Hi Anonymous,

here is a rough high-level description of how I coach my coachees on M&A cases:

1. Clarify the underlying reasons objectives of the potential acquisition.

Reasons could be:

• General strategic reasons? (like consolidation pressure, access to new markets, diversification, preventing competitor moves,...)
• Synergies (Revenue / Cost / Financial)

The objective will most likely be economic value creation.

2. If economic value creation is indeed the objective, you can build your framework on the following structure.

Condition for the acquisition to make economic sense:

[ (A) Initial value of the target] - [ (B) Excpected price for the acquisition] + [ (C) Value increase after acquisition] >> 0

where

• (A) is essentially an analysis of current profits projected over the target investment horizon (to be clarified with interviewer)
• (B) is, well, the price
• (C) encompasses expected profit increase due to better management, Synergies, but also the negative effects of integration costs and financing costs (if appliccable)

So you can build a framework consisting of these 3 blocks, and further enrich it with a 4th lens, i.e., risks and barriers (cultural, legal).

So there is an array of different analyses that need to be conducted for an exhaustive assessment. Within the frame of a case interview, informed hypothesizing and/or interviewer guidance will determine the focus areas.

Cheers, Sidi

(editiert)

Antwort auf Frage:

## Evaluating a potential acquisition

Hi,

At the consulting interviews you may have two types of PE cases:

1. Due-diligence of the target company
2. Synergies calculation of two merging companies

You can check which type of case you have by asking whether the PE fund already has another company in the portfolio for the synergies.

1. For DD you can use the following structure:

Market

• Size
• Growth rates
• Profitability
• Segments
• Regulation
• Distribution channels

Competition

• Market shares of competitors and their segments (see the next point)
• Concentration / fragmentation (Fragmented market with lots of small players is less mature and easier to enter from a scratch. Concentrated market is hard to enter but has potential acquisition targets)
• Unit economics of the players (Margins, relative cost position)
• Key capabilities of the players (e.g. suppliers, assets, IP, etc)

Company

• Unit economics (Margins, costs) in current or target markets
• Brand
• Product mix
• Key capabilities

Feasibility of exit:

• Exit multiples
• Exit time
• Existence of buyers

2. For Synergies Calculation you can use the following structure:

1. Revenue synergies - here you calculate the synergies in price and quantity (depending on the case it may be new geographies, new products, new distribution channels, bigger share on shelves crosselling opportunities, etc.)
2. Cost synergies - typically you use a value chain structure tailored to the industry (e.g. supply-production-distribution-marketing-after sales support)
3. Risks - major risks that can decrease the synergies (tip: don't underestimate the merging companies culture factor)
4. Total synergies potential in \$, adjusted by risk (probability of failure)

In private equity interviews, the cases will be much more detailed in financial part. Depending on the company you'll need to:

• Find the relevant information in P&L and Balance sheet
• Do the simplified valuation using NPV: calculate cash flows and make assumptions about growth rate and discount rate
• Do the valuation using comps - you'll have to explain which comps you will use and why

Good luck!

Antwort auf Frage:

## Evaluating a potential acquisition

Hi Anonymous,

quoting a previous post that I wrote, I would consider the following steps:

1) GOAL CLARIFICATION. It is always good to start with the end in mind – thus what is the specific reason why they want to buy the company? Just make profits reselling in 3 years for a higher price? Benefit from synergies with a portfolio company? Test the market for a bigger acquisition?

2) INDUSTRY ANALYSIS. Industry evolution can have a strong impact on the future results of the target (think about newspapers vs cryptocurrency growth and size) thus should always be part of your analysis There are two macrovariables here.

• Key industry numbers/facts. This includes for the market and potential subsegments the following
• Growth
• Size
• Barriers to entry (BTE)
• Key industry players. This includes:
• Customers segmentation
• Competition
• Occasionally for some cases: suppliers and substitutes.

You should present this area connecting with the goal, and not purely listing the elements to analyse as if it was a laundry list. The best way to do so is explain how a certain variable will help you to achieve you goal. Eg, if your goal is to increase revenues with the acquisition, don’t simply say “I want to look at growth, size and BTE”, rather “I want to look at growth and size – this will tell me if the market segment of the target has the potential to provide enough revenues for our client. I would also like to check BTE, to understand which are the obstacles in entering such a market/segment via an acquisition and thus increase revenues”.

3) COMPANY - TARGET OBJECTIVE FEASIBILITY. Here you want to check the fit between the client and the target.

• What is the result in terms of the key objective we have (eg profits, revenues, increase in value, etc) if we buy this company?
• Are there positive or negative synergies with the acquisition?

In the first point, you will probably have to go through a profitability/revenue/cost framework, to calculate the effective result.

4) PRICE AND CAPABILITIES. Once you know the industry/segment is attractive and you can reach you goal buying the company, you should consider if the price is fair and you have enough capabilities

• Is the price fair? To understand so, you should do a comparison between the acquisition price and the company value, using multiples in the industry or a DCF analysis.
• Do we have enough money and other required resources (eg more proper management) to implement our strategy?

You can find more information on the DCF analysis at the link below: https://www.preplounge.com/en/consulting-forum/case-net-present-value-calculations-325

5) RISKS AND NEXT STEPS. What are the major elements that we should further analyse based on the previous points (eg regulator decision, potential other targets to consider, implementation risks, exit strategies)?

Hope this helps,

Francesco

I agree 100% with both Sidi and Vlad.

Here are some extra points to think about - I have never seen them in a case however great to chat about with the interviewer

Generally, in a public takeover, we use current share price +30% = Offer price. If you know there are for example 1 million shares outstanding, you can calculate the overall valuation price.

Also always ask for a multiple figures - a past sale etc to help benchmark the valuation also.

Antwort auf Frage:

## Verwandte BootCamp-Artikel

### Opportunity Costs

Opportunity costs are an economic concept to quantify benefits of (discarded) alternatives. They measure the lost benefits that occur if you choose the best alternative instead of the second best one.

Quiz

### Mergers and Acquisitions

Mergers & Acquisitions are often the answer to broader problems introduced in your Case interviews. Analyze feasibility, assets, target and industry to crack the Merger & Acquisition case

### Cost-Benefit Analysis

Investments or single business cases need to be evaluated based on a certain set of criteria. Since financial performance is the key criterion in most cases you need to have an idea about future financial impacts. A key tool to asses this impact is the cost-benefit analysis which is used to determine the net effect of potential revenues and costs.

1 Q&A

### Competitive Response

In a competitive response case study, your job is either to analyze what your client should do in response to a move performed by a major competitor or to anticipate what competitors will do in response to a move performed by the client

### Valuation

Valuation case studies require you to estimate how much a firm, patent, or service is worth. For these cases, use the Discounted Cash Flow method or the Industry multiple method.

## Verwandte Cases

### General Holding

35,3 Tsd. mal gelöst | Bewertung: (4.3 / 5.0) |

Der Klient ist eine französische Holding, welche einen jährlichen Umsatz von €1 Milliarde hat. Sie halten fast alle Arten von Unternehmen, die meisten in der „Low tech Herstellung“, darunter unter anderem auch „Öl & Gas“ und „Automobil“ Firmenteile. Es gibt keinen bestimmten Bereich auf den sie ihr ... Ganzen Case öffnen

### Chip equity

28,6 Tsd. mal gelöst | Bewertung: (4.5 / 5.0) |

Unser Klient ist Chip’n‘Chip, eine Holding für Unternehmen aus dem Elektronikbereich. Sie möchten in OnBoard, ein Platinen Hersteller, investieren und fragen, ob es eine gute Investition ist. Wie würdest du ihnen helfen? Ganzen Case öffnen