I struggle coming up with a crisp approach how to evaluate an M&A situation (i.e., whether acquiring another company creates sufficient value). How to do this in a case interview??
Evaluating a potential acquisition
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,...)
- Tax advantages?
- 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
- (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.
At the consulting interviews you may have two types of PE cases:
- Due-diligence of the target company
- 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:
- Growth rates
- Distribution channels
- 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)
- Unit economics (Margins, costs) in current or target markets
- Product mix
- Key capabilities
Feasibility of exit:
- Exit multiples
- Exit time
- Existence of buyers
2. For Synergies Calculation you can use the following structure:
- 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.)
- Cost synergies - typically you use a value chain structure tailored to the industry (e.g. supply-production-distribution-marketing-after sales support)
- Risks - major risks that can decrease the synergies (tip: don't underestimate the merging companies culture factor)
- 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
You can find very interesting insights for your question in this previous thread (that is already addressing the same topic)
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