Framework MECE ?

Hi

In consulting interviews you may have two types of M&A cases:

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

There are two ways to identify the exact type of a case:

• The interviewer will tell you
• In the beginning, while asking clarifying questions you ask what is the objective and if we have any other company in the portfolio that can have potential synergies

1. For commercial DD you can use the following structure:

Market

• Size
• Growth rates
• Profitability
• Segments
• 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!

Hi Anonymous,

I would suggest the following framework for an M&A case, as it would be more MECE and inclusive of some other relevant areas:

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) TARGET INDUSTRY. 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, 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 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 and thus increase revenues”.

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

• Can our specific client reach its objective in the selected market (eg profits, revenues, increase in value, etc)?
• 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 is attractive and you can reach you goal, 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

You are right, this doesn't look like it is going to be MECE since you have similar sub branches in two distinct sections of your framework. My first reaction is therefore, why do you even want to insist and use this?

If you really really want to have a similar framework though, you can try to get through it by changing the approach slightly. It is all a matter of how you present it. Here are a couple of directions you could go:

Example A:

- Our company's characteristics

- Potential target's characteristics (complementary or compatible strengths; gaps it wouldn't help us to fill)

- ...

Example B:

- Our company's characteristics + growth objectives / weakness we are trying to address

- Does this specific target help us address the weakness & how

- ...

I am sure other experts will come with additional suggestions as well. My main point is this though: if the framework you are considering shows such obvious weaknesses right from the start, why be stubborn and insist on spending the next minute to make it work, when you could come up with a viable alternative in just a few more seconds? 

Dear A,

in general a good structure can be evaluated by a certain depth and breadth. The “depth” should be at least 3-4 levels while the “breadth” should cover the entire solution space. You can cross-check this with the MECE principles (For details see respective article on Preplounge), but the CE (collectively exhaustive) part is basically defining your breadth.

Finally, make sure to check for inter-linkages in your structure and point them out.

Simon