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Expert with best answer

Sidi

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4

M&A Case with focus on financial soundness

M

Hi all,

I have the following case and wanted to get feedback for my structure:

Client is an energy company with a lot of cash available and considers acquiring and consolidating around 500 small service companies that offer heating and cooling systems for companies and household. The CEO approaches us to help him whether this investment makes sense financially.

My approach would be

  • Industry – Is the industry of the target company attractive?
    • Size – Is the market big enough?
    • Growth – Is the market growing?
    • Trends – Are there any specific trends that are in favour for these service companies?
    • Regulation / Anti-trust - Are there any regulatory barriers to overcome?
  • Target company
    • Financial Situation and performance of target companies
    • Ability/willingness to be consolidated – These small companies can be consolidated?
    • Customers – What kind of customers are they serving?
  • Acquiring company
    • Capabilities – Capable of acquiring and consolidating 500 small service firms?
    • Funds – Availability of funds for acquisition or options to raise funds?
    • Customers – What kind of customers are they serving?
  • Opportunity of acquisition
    • Synergies
      • Cost synergies for acquiring and target company
      • Revenues synergies for acquiring and target company
    • Valuation of target / financial assessment – What is the value of the target company and comparison to price?
  • Risks and next steps
    • Cultural risks
    • Legal risks/anti-trust legislation

The solution in a casebook emphasizes strongly on revenues and costs (for acquiring and target companies with synergy effects) as two major buckets for the analysis and one bucket with industry covering customers, competition and regulation.

What is your opinion on my structure and the recommendation of the casebook? Did I miss anything important and is the structure MECE enough?

Best

Hi all,

I have the following case and wanted to get feedback for my structure:

Client is an energy company with a lot of cash available and considers acquiring and consolidating around 500 small service companies that offer heating and cooling systems for companies and household. The CEO approaches us to help him whether this investment makes sense financially.

My approach would be

  • Industry – Is the industry of the target company attractive?
    • Size – Is the market big enough?
    • Growth – Is the market growing?
    • Trends – Are there any specific trends that are in favour for these service companies?
    • Regulation / Anti-trust - Are there any regulatory barriers to overcome?
  • Target company
    • Financial Situation and performance of target companies
    • Ability/willingness to be consolidated – These small companies can be consolidated?
    • Customers – What kind of customers are they serving?
  • Acquiring company
    • Capabilities – Capable of acquiring and consolidating 500 small service firms?
    • Funds – Availability of funds for acquisition or options to raise funds?
    • Customers – What kind of customers are they serving?
  • Opportunity of acquisition
    • Synergies
      • Cost synergies for acquiring and target company
      • Revenues synergies for acquiring and target company
    • Valuation of target / financial assessment – What is the value of the target company and comparison to price?
  • Risks and next steps
    • Cultural risks
    • Legal risks/anti-trust legislation

The solution in a casebook emphasizes strongly on revenues and costs (for acquiring and target companies with synergy effects) as two major buckets for the analysis and one bucket with industry covering customers, competition and regulation.

What is your opinion on my structure and the recommendation of the casebook? Did I miss anything important and is the structure MECE enough?

Best

4 answers

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Best Answer
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Hi!

I believe you need a very careful explanation of what a structure actually is. Frankly, what you have outlined above is not an approach towards answering the client's question. It is just a list of topics you want to look into (albeit a nicely structured list of course).

What most people don't understand (including most junior consultants by the way) is the following:

  • The purpose of a structure is NOT to tell the client/interviewer what you want to look into! This is just a fallout of the structure.
  • The purpose of a structure is to clearly explain, HOW you will answer the precise question that has been asked! And this is something completely different than saying "I'm going to look into four areas..." - this doesn't tell anything about how you will answer the question.

What I very strongly recommend is the following test:

  • Is the structure referring back to the core question asked by the client?
  • Does the structure have an inherent logic according to which this question can be answered?

For example, a structure like "I want to look into four areas: Market Outlook, Target Company, Acquiring Company and Risks" does not pass any of these tests. Telling the interviewer what you want to look into is not a good structure, but just a list of topics. But it lacks the underyling rationale WHY you want to scrutinize these topics, and what you want to test by looking into them, and how this test will inform your answer to the client's question.

A structure is a logic - the logic according to which you will answer the question at hand. It is ideally rooted in a top-down disaggregation of the client objective which underlies the core question.

So you need to do three things:

  1. Distill the core question (should we do this acquisition move?)
  2. Define the criterion to answer the question (--> the conditions under which the answer to the above question would be YES --> there are 3 conditions at the highest level: (i) does it make financial sense?, (ii) are we able to execute this?, and (iii) can we adequately cope with the potential risks?)
  3. The central and most important condition is (i), so we have to deine the criterion under which it makes financial sense. By pure logic, it makes sense if the additional value (=profit) created by the acquisition significantly exceeds the investments that we need to put on the table over the course of our investment horizon. So there is three things we have to quantify: 1. Additional Profit, 2. Investment Time Frame, and 3. Investment Amount.

ONLY THEN you start to outline all these qualitative elements that you have outlined above. Becaus now, they don't hang in the air anymore, but they serve a clear purpose: the purpose of checking, whether these conditions are met! (--> Quantifying the additional profits that can be realistically expected after acquisition and checking whether they are high enough to outweigh the investment in a reasonable time frame | Assessing whether the required capabilties are in place | understanding which potential risks need to be mitigated) But these buckets are NOT the core of the structure. They are just the "fallouts". The heart and soul of your structure is the logice that I just explained.

Outlining this by means of a top down logic tree is something that would set you apart lightyears from essentially any candidate who comes up with the typical bucket thinking.

It is a skill that needs to be learned, but once you master the principles, "difficult cases" simply don't exist anymore.

Cheers, Sidi

Hi!

I believe you need a very careful explanation of what a structure actually is. Frankly, what you have outlined above is not an approach towards answering the client's question. It is just a list of topics you want to look into (albeit a nicely structured list of course).

What most people don't understand (including most junior consultants by the way) is the following:

  • The purpose of a structure is NOT to tell the client/interviewer what you want to look into! This is just a fallout of the structure.
  • The purpose of a structure is to clearly explain, HOW you will answer the precise question that has been asked! And this is something completely different than saying "I'm going to look into four areas..." - this doesn't tell anything about how you will answer the question.

What I very strongly recommend is the following test:

  • Is the structure referring back to the core question asked by the client?
  • Does the structure have an inherent logic according to which this question can be answered?

For example, a structure like "I want to look into four areas: Market Outlook, Target Company, Acquiring Company and Risks" does not pass any of these tests. Telling the interviewer what you want to look into is not a good structure, but just a list of topics. But it lacks the underyling rationale WHY you want to scrutinize these topics, and what you want to test by looking into them, and how this test will inform your answer to the client's question.

A structure is a logic - the logic according to which you will answer the question at hand. It is ideally rooted in a top-down disaggregation of the client objective which underlies the core question.

So you need to do three things:

  1. Distill the core question (should we do this acquisition move?)
  2. Define the criterion to answer the question (--> the conditions under which the answer to the above question would be YES --> there are 3 conditions at the highest level: (i) does it make financial sense?, (ii) are we able to execute this?, and (iii) can we adequately cope with the potential risks?)
  3. The central and most important condition is (i), so we have to deine the criterion under which it makes financial sense. By pure logic, it makes sense if the additional value (=profit) created by the acquisition significantly exceeds the investments that we need to put on the table over the course of our investment horizon. So there is three things we have to quantify: 1. Additional Profit, 2. Investment Time Frame, and 3. Investment Amount.

ONLY THEN you start to outline all these qualitative elements that you have outlined above. Becaus now, they don't hang in the air anymore, but they serve a clear purpose: the purpose of checking, whether these conditions are met! (--> Quantifying the additional profits that can be realistically expected after acquisition and checking whether they are high enough to outweigh the investment in a reasonable time frame | Assessing whether the required capabilties are in place | understanding which potential risks need to be mitigated) But these buckets are NOT the core of the structure. They are just the "fallouts". The heart and soul of your structure is the logice that I just explained.

Outlining this by means of a top down logic tree is something that would set you apart lightyears from essentially any candidate who comes up with the typical bucket thinking.

It is a skill that needs to be learned, but once you master the principles, "difficult cases" simply don't exist anymore.

Cheers, Sidi

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Hello!

During my time in McKinsey I did 3 M&A DDs, and it´s one of the situations where the case and what is done later in the engagements are most similar!

Hence, a few comments:

  • Synergy calculation is key, normally in terms of:
    • Lay-offs
    • Buildings, equipment and other CAPEX
    • Integration of IT/operational systems once you have reached the Target Operating Model
  • The Risk bucket is also key, and needs further enriching such as:
    • Antitrust risks - KEY in all M&A cases
    • Brand perception after the merge
    • Client reaction to merge
    • Post-merger integration: mission and vision, different working cultures, compensation schedules, etc.

The best of M&A cases is that, once you know how to solve one, they are all solved. They are extremly repetitive.

Hope it helps you!

Cheers,

Clara

Hello!

During my time in McKinsey I did 3 M&A DDs, and it´s one of the situations where the case and what is done later in the engagements are most similar!

Hence, a few comments:

  • Synergy calculation is key, normally in terms of:
    • Lay-offs
    • Buildings, equipment and other CAPEX
    • Integration of IT/operational systems once you have reached the Target Operating Model
  • The Risk bucket is also key, and needs further enriching such as:
    • Antitrust risks - KEY in all M&A cases
    • Brand perception after the merge
    • Client reaction to merge
    • Post-merger integration: mission and vision, different working cultures, compensation schedules, etc.

The best of M&A cases is that, once you know how to solve one, they are all solved. They are extremly repetitive.

Hope it helps you!

Cheers,

Clara

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Hi! Your structure looks good to me, nice and MECE.

If you have more content and background information in the case as you build your structure you should try to formulate a hypothesis on what you think are the most important buckets (and why?) or what you would do first in terms of your analysis.

Best,
Daniel

P.S. Answer to Sidi:

Sidi, you describe it here a little bit like your way is the only way of creating a structure. You know however, that in a real interview your structure would be rated as good as the structure of M, who asked this question. As long as your structure is creative, MECE, has a logic (any logic, it can be 10 different types of logics) and a hypothesis – it doesn’t matter WHAT kind of structure you have.

Hi! Your structure looks good to me, nice and MECE.

If you have more content and background information in the case as you build your structure you should try to formulate a hypothesis on what you think are the most important buckets (and why?) or what you would do first in terms of your analysis.

Best,
Daniel

P.S. Answer to Sidi:

Sidi, you describe it here a little bit like your way is the only way of creating a structure. You know however, that in a real interview your structure would be rated as good as the structure of M, who asked this question. As long as your structure is creative, MECE, has a logic (any logic, it can be 10 different types of logics) and a hypothesis – it doesn’t matter WHAT kind of structure you have.

(edited)

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The answer looks good - maybe you can try to add a few more points:

- Industry

  • would also look at the main players and how is the market strucured (e.g., degree of concentration)
  • you can also look at customer and their behaviour

- Target

  • positioning vs. other players

- Acquirer

  • precedent experience in M&A

- Risks

  • Competitive response

The answer looks good - maybe you can try to add a few more points:

- Industry

  • would also look at the main players and how is the market strucured (e.g., degree of concentration)
  • you can also look at customer and their behaviour

- Target

  • positioning vs. other players

- Acquirer

  • precedent experience in M&A

- Risks

  • Competitive response

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