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Vlad

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8

Investment Cases - M&A, PE, HF differences

Hi everyone, when tackling investment style cases, I get confused at the nuances between a firm being acquired by another firm, a private equity firm, or a hedge fund.

Are there key things to look out for that make these cases different from each other? I'm not necessarily looking for a framework, just some pointers to bear in mind. Thanks

Hi everyone, when tackling investment style cases, I get confused at the nuances between a firm being acquired by another firm, a private equity firm, or a hedge fund.

Are there key things to look out for that make these cases different from each other? I'm not necessarily looking for a framework, just some pointers to bear in mind. Thanks

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Hi,

Hedge funds are buying public stocks, I don't it can be the case.

PE and Another firm acquisitions are very similar. Actually, you may have two types of cases:

  1. Commercial due-diligence of the target company (Either acquired by another company or by PE)
  2. Synergies calculation of two merging companies (Or synergies with another company in the PE portfolio)

Note also that it can be a mix of both.

1. For Due Diligence you can use the following structure:

Market

  • Size
  • Growth rates
  • Segments
  • Regulation
  • Etc

Competition

  • Market shares
  • Growth rates
  • Profits
  • Unit economics (Price, Cost per unit, etc)
  • Key capabilities of the players (e.g. suppliers, assets, IP, etc)
  • Etc

Company

  • Market share
  • Growth rate
  • Profit
  • Unit economics (Price, Cost per unit, etc)
  • Key capabilities of the players (e.g. suppliers, assets, IP, etc)
  • Etc

Feasibility of exit (in case of a PE company):

  • Valuation
  • Exit multiples
  • Exit time
  • Existence of buyers
  • Risks

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. Financial synergies - working capital, capital structure, tax. Almost not used in MBB cases
  4. Risks - major risks that can decrease the synergies (tip: don't underestimate the merging companies culture factor)
  5. Total synergies potential in $, adjusted by risk (probability of failure)

Good luck!

Hi,

Hedge funds are buying public stocks, I don't it can be the case.

PE and Another firm acquisitions are very similar. Actually, you may have two types of cases:

  1. Commercial due-diligence of the target company (Either acquired by another company or by PE)
  2. Synergies calculation of two merging companies (Or synergies with another company in the PE portfolio)

Note also that it can be a mix of both.

1. For Due Diligence you can use the following structure:

Market

  • Size
  • Growth rates
  • Segments
  • Regulation
  • Etc

Competition

  • Market shares
  • Growth rates
  • Profits
  • Unit economics (Price, Cost per unit, etc)
  • Key capabilities of the players (e.g. suppliers, assets, IP, etc)
  • Etc

Company

  • Market share
  • Growth rate
  • Profit
  • Unit economics (Price, Cost per unit, etc)
  • Key capabilities of the players (e.g. suppliers, assets, IP, etc)
  • Etc

Feasibility of exit (in case of a PE company):

  • Valuation
  • Exit multiples
  • Exit time
  • Existence of buyers
  • Risks

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. Financial synergies - working capital, capital structure, tax. Almost not used in MBB cases
  4. Risks - major risks that can decrease the synergies (tip: don't underestimate the merging companies culture factor)
  5. Total synergies potential in $, adjusted by risk (probability of failure)

Good luck!

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The key difference between M&A and PE would be one being more of a strategic while the other latter being a financial buyer. As a result, for M&A, you would be asking more about synergies for the acquiror that justifies the acquisition and price. Cases with HF is not typical but I have seen a few where its important to clarify the investment strategy (e.g., long/short, event driven, credit, etc.) as that will shape what to discuss in the case.

---

A litte more detail below:

M&A: in a case context is typically one corporate acquiring another public/private corporate (or a carve-out of it) and so there is more of a strategic intention (e.g., synergies) than purely financial which is often why a corporate acquiror could be willing to pay more than a pure financial investor

PE: generally would be the acquisition of either controlling (buyout) or minority (growth equity) stake of a private (or public that will go through a management buyout and become private). The investment thesis is largely around the returns over the funds investment period of plus/minus 5 years where they typically aim for an IRR of 15-20%. Occassionally, they will also make bolt-on acquisitions to inorganically grow their existing portfolio company but otherwise the intention is largely financial

HF: although they do cover more asset classes (e.g., private credit), will generally acquire stake in public companies either for growth/return as well as to hedge that the share price will go down (i.e., shorting the stock). The key considerations are highly depednent on the fund's investment style (e.g., long/short, event-driven, credit, macro-driven, etc.)

The key difference between M&A and PE would be one being more of a strategic while the other latter being a financial buyer. As a result, for M&A, you would be asking more about synergies for the acquiror that justifies the acquisition and price. Cases with HF is not typical but I have seen a few where its important to clarify the investment strategy (e.g., long/short, event driven, credit, etc.) as that will shape what to discuss in the case.

---

A litte more detail below:

M&A: in a case context is typically one corporate acquiring another public/private corporate (or a carve-out of it) and so there is more of a strategic intention (e.g., synergies) than purely financial which is often why a corporate acquiror could be willing to pay more than a pure financial investor

PE: generally would be the acquisition of either controlling (buyout) or minority (growth equity) stake of a private (or public that will go through a management buyout and become private). The investment thesis is largely around the returns over the funds investment period of plus/minus 5 years where they typically aim for an IRR of 15-20%. Occassionally, they will also make bolt-on acquisitions to inorganically grow their existing portfolio company but otherwise the intention is largely financial

HF: although they do cover more asset classes (e.g., private credit), will generally acquire stake in public companies either for growth/return as well as to hedge that the share price will go down (i.e., shorting the stock). The key considerations are highly depednent on the fund's investment style (e.g., long/short, event-driven, credit, macro-driven, etc.)

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M&A cases are basically the same type of cases as PE cases: a company gets acquired and you need to assess whether that's a good idea or not. The one difference is that in M&A cases you need to assess two additional dimension: synergies/dissynergies and implications on the broader market

Since the buyer is not a fund (so typically without a vested interest in the industry of the target), but a corporate, they typically do so for a strategic reason and you will need to assess what the impact on the combined entity and the market will be. The gray area in between is a PE fund that buys a target with the intention to merge it with an existing portfolio company. In that case it technically becomes a M&A case.

Specifically, you should look at:

  • Cost & revenue synergies - can the joint entity take out costs, e.g. by merging HQs, or achieve higher sales, e.g. by selling complimentary products or services, or just by having more market power
  • Dissynergies like the loss of contracts because customers want to buy from multiple suppliers or need to invite at least 3 players to tenders, etc.
  • Strategic implications, like vertical/horizontal integrations, etc
  • Regulatory implications like anti-trust

Any case involving hedge funds would be something entirely different, as hedge funds deal with liquid assets, not entire companies.

M&A cases are basically the same type of cases as PE cases: a company gets acquired and you need to assess whether that's a good idea or not. The one difference is that in M&A cases you need to assess two additional dimension: synergies/dissynergies and implications on the broader market

Since the buyer is not a fund (so typically without a vested interest in the industry of the target), but a corporate, they typically do so for a strategic reason and you will need to assess what the impact on the combined entity and the market will be. The gray area in between is a PE fund that buys a target with the intention to merge it with an existing portfolio company. In that case it technically becomes a M&A case.

Specifically, you should look at:

  • Cost & revenue synergies - can the joint entity take out costs, e.g. by merging HQs, or achieve higher sales, e.g. by selling complimentary products or services, or just by having more market power
  • Dissynergies like the loss of contracts because customers want to buy from multiple suppliers or need to invite at least 3 players to tenders, etc.
  • Strategic implications, like vertical/horizontal integrations, etc
  • Regulatory implications like anti-trust

Any case involving hedge funds would be something entirely different, as hedge funds deal with liquid assets, not entire companies.

(edited)

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Hi there,

In consulting interviews you will get cases about M&A within industry players or PE. Hedge Fund acquisition cases are definitely not common.

The basic structure is the same for both PE and industry acquisitions. Some points to keep in mind for PE cases:

  • The goal is normally to resell the company in X years for a multiple of the current value. This means you will have to increase FCF (usually proxied by profits) at the end of X years
  • Synergies/cannibalization are usually less relevant (although there may be portfolio companies similar to the target, so it is always good to check)

For any other questions please feel free to PM me.

Best,
Francesco

Hi there,

In consulting interviews you will get cases about M&A within industry players or PE. Hedge Fund acquisition cases are definitely not common.

The basic structure is the same for both PE and industry acquisitions. Some points to keep in mind for PE cases:

  • The goal is normally to resell the company in X years for a multiple of the current value. This means you will have to increase FCF (usually proxied by profits) at the end of X years
  • Synergies/cannibalization are usually less relevant (although there may be portfolio companies similar to the target, so it is always good to check)

For any other questions please feel free to PM me.

Best,
Francesco

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Hello!

If you are interviewing for consulting, don´t over-think it.

It´s true that there are huge differences in real life, but cases are very very similar among them.

The issue tree always need to cover the economic part -very important to think of synergies, both cost and revenue- and the social and political part derived form post-merger integration.

Hope it helps!

Cheers,

Clara

Hello!

If you are interviewing for consulting, don´t over-think it.

It´s true that there are huge differences in real life, but cases are very very similar among them.

The issue tree always need to cover the economic part -very important to think of synergies, both cost and revenue- and the social and political part derived form post-merger integration.

Hope it helps!

Cheers,

Clara

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Hi there,

I also advise you to not overthink it. If you solve enough cases of every category, you will notice the pointers by yourself.

Cheers,

GB

Hi there,

I also advise you to not overthink it. If you solve enough cases of every category, you will notice the pointers by yourself.

Cheers,

GB

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Hi there,

M&As are the act of buying/acquiring/merging entities.Any company can do this. Think of this as a verb/noun/activity.

Private equity firms are the actors. I.e. they are doing/executing the acitivity. They may act on behalf of companies (i.e. get paid to manage the M&A) or, they are just simply in the business of buying/changing/selling/flipping companies. Think of them as home renevators. They may buy a lot of land, knock down the house and build two. Or they may jsut re-sell. Or they may renovate. This is what PE firms do with companies!

Hedge funds just invest in the market for wealthy investors. They don't generally deal with M&As.

Hi there,

M&As are the act of buying/acquiring/merging entities.Any company can do this. Think of this as a verb/noun/activity.

Private equity firms are the actors. I.e. they are doing/executing the acitivity. They may act on behalf of companies (i.e. get paid to manage the M&A) or, they are just simply in the business of buying/changing/selling/flipping companies. Think of them as home renevators. They may buy a lot of land, knock down the house and build two. Or they may jsut re-sell. Or they may renovate. This is what PE firms do with companies!

Hedge funds just invest in the market for wealthy investors. They don't generally deal with M&As.

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