Mergers & Acquisitions (M&A) are often an answer to broader problems during case interviews
Merger & Acquisition cases are best practiced using mock interviews
Many growth strategy case studies eventually lead to M&A questions. For instance, companies with excess funds, searching for ways to grow quickly might be interested in acquiring upstream or downstream suppliers (vertical integration), direct competitors (horizontal integration), complementary businesses, or even unrelated businesses to diversify their portfolio. The most important requirement for an M&A is that it must increase the shareholders' value, and it must have a cultural fit even when the decision financially makes sense.
Analogous to making a purchase at a grocery store, M&A can be viewed as a "buying decision". In general, we know that a consumer first determines the "need" to buy a product, followed by analyzing whether he or she can afford the product. After analyzing the first 2 critical factors, the consumer might look at the long/short term benefits of the product. Applying similar logic in M&A cases:
- Why does the company want to acquire?
- How much is the target company asking for its purchase price & is it fair (see cost-benefit analysis)? Can the acquiring company afford to pay the valuation? Financial valuation will generally include industry & company analysis.
- Benefits - potential synergies.
- Feasibility and risks (cultural and economical).
Key areas to analyze: assets, target, industry, and feasibility
When you are sure that it is an M&A case, proceed with the following analyzes after structuring the case as discussed above:
Analyze the client’s company
- Why does the client want to acquire? Potential reasons could be the following:
- (a) Strategic (market position, growth opportunities, diversification of product portfolio)
- (b) Defensive (acquisition by another competitor could make the competitor unconquerable)
- (c) Synergies/value creation (cost-saving opportunities such as economies of scale, cross-selling, brand)
- (d) Undervalued (ineffective management, unfavorable market, and the client has the power to bring the target company to its potential value)
- In which industry does the client operate?
- Which other businesses does the client possess? Look out for synergies?
- What are the client’s key customer segments?
Analyze the target industry
Once it's clear why the client is interested in acquiring a particular company, start by looking at the industry the client wants to buy. This analysis is crucial since the outlook of the industry might overshadow the target's ability to play in it. For instance, small/unprofitable targets in a growing market can be attractive in the same way as great targets can be unattractive in a dying market.
Potential questions to assess are:
- Can the market be segmented, and does the target only play in one of the segments of the market?
- How big is the market?
- What are the market’s growth figures?
- What is the focus? Is it a high volume/low margin or a low volume/high margin market?
- Are there barriers to entry?
- Who are the key competitors in the market?
- How profitable are the competitors?
- What are possible threats?
Analyze the target company
After analyzing the target industry, understand the target company. Try to determine its strengths and weaknesses (see SWOT analysis) and perform a financial valuation to determine the attractiveness of the potential target. You are technically calculating the NPV of the company, but this calculation likely is not going to be asked in the case interview. However, having the knowledge of when it is used (e.g., financial valuation) is crucial. Analyze the following information to determine the market attractiveness:
- The company’s market share
- The company’s growth figures as compared to that of competitors
- The company’s profitability as compared to that of competitors
- How can current businesses from the client leverage revenues and profitability from the business to be acquired (keyword synergies)?
- Does the company possess any relevant patents or other useful intangibles (see Google purchasing Motorola)?
- Which parts of the company to be acquired can benefit from synergies?
- The company’s key customers
Analyze the feasibility of the M&A
Finally, make sure to investigate the feasibility of the acquisition.
Important questions here are:
- Is the target open for an acquisition or merger in the first place? If not, can the competition acquire it?
- Are there enough funds available (have a look at the balance sheet or cash flow statement)? Is there a chance of raising funds in the case of insufficient funds through loans etc.?
- Is the client experienced in the integration of acquired companies? Could a merger pose organizational/management problems for the client?
- Are there other risks associated with a merger? (For example, think of political implications and risks of failure, like with the failed merger of Daimler and Chrysler.)
You should now be able to evaluate the venture’s financial and qualitative attractiveness for the client. If you conclude that the client should go on with the M&A, make sure to structure your conclusions in the end. Your suggestions should also include:
- potential upsides of the merger
- potential risks and how are we planning to overcome/mitigate them