M&A framework

M&A
Recent activity on Mar 21, 2019
3 Answers
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Anonymous A asked on Mar 21, 2019

Hello,

I'm currently in the early process of preparing for my consulting interview, I'm wondering for the M&A case: Client wants to acuqire A, ask you if it's a good idea.

I will look at company A to see what value they will bring to the client, their market share, competitions and synergies. Do I need to look at the client? Or this whole case is about investing the aquisition target?

Appriciate fo ryour reply as I'm not MBA background and very new to cases.

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Jacopo
Expert
replied on Mar 21, 2019
Project leader BCG, Bain and A.T. Kearney / 200+ real interviews

Hi,

Yes, if the potential acquirer is a Strategic Buyer (e.g. multinational companies) and not a Financial Buyer (e.g. funds) yes, you should look at potential synergies in terms of Cost synergies and Revenue synergies.

I am including a standard due diligence framework…

  1. Is the industry sufficiently attractive?
    • Financial
      • Market size
      • Market growth
      • Market profitability
      • Market segments (size/growth/profit)
    • Non-financial
      • Lifecycle of industry
      • Regulatory risks
      • Other trends
  2. Is the target company/asset attractive?
    • Financial
      • Size (revenue)
      • Market share
      • Growth
      • Profitability/Cost position
      • Segments where present
      • Assets & Liabilities
    • Non-financial
      • Company management
      • Intagible assets (e.g. brand loyalty)
      • Is product differentiated?
  3. Are the competitive situation and competitive threats acceptable?
    • Existing competition
      • Existing competitors (size, growth, profitability, cost positions, segments)
      • Nature of competition (e,g, local vs. national)
    • New threats
      • Barriers to entry (e.g. startup costs, expertise, regulatory, customer loyalty)
      • Threats of new competitors
      • Threats of substitutes
  4. Is the company a good fit for us?
    • Does it fit our investment strategy? (e.g. long term vs. short term)
    • Exit strategies
      • Financial buyers (e.g. other funds)
      • Strategic buyers (e.g. MNCs)
    • (if a strategic buyer) What are the potential synergies?
      • Revenue synergies
      • Cost synergies

I hope it helps,
Best,
Jacopo

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Vlad
Expert
Content Creator
replied on Mar 21, 2019
McKinsey / Accenture Alum / Got all BIG3 offers / Harvard Business School

Hi,

You need to ask in the clarifying questions:

  • What are the reasons for the deal and what are the client's objectives
  • Ask if there are any synergies

For consulting interviews, there are two types of frameworks you may use:

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

Note also that it can be a mix of both.

1. For Due Diligence 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

  • Revenues and growth rates
  • Profit
  • Unit economics (Margins, costs) in current or target markets
  • Brand
  • Product mix
  • Key capabilities

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

  • Exit valuation
  • 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
  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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Anonymous B on Feb 17, 2020
Hi Vlad, I like our framework, however I haven't noticed Deal Economics here, i.e. comparison of value (stand alone DCF, synergies) vs prices. Also there might be a point of whether our Client has enough funds to finance the deal or its BS is strong enough to attract debt. Could you guide whether its somewhere in your framework (I just failed to notice) or it's not so importatant for the case?

(edited)

Alexander replied on Mar 21, 2019

As you mentioned, identifying potential synergies is an important aspect of this kind of case and obviously requires discussing the client and his position. However, the depth to which the client needs to be discussed varies depending on the scenario and on what the client is hoping to achieve.

As you mentioned that you're new to cases, I would also like to point you towards the Bootcamp, which has some very good articles. For instance, here is the one dealing with M&A cases: https://www.preplounge.com/en/bootcamp.php/case-cracking-toolbox/identify-your-case-type/mergers-and-acquisitions

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Jacopo

Project leader BCG, Bain and A.T. Kearney / 200+ real interviews
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