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PE due diligence vs regular M&A

Anonymous A

What is the difference between how to approach PE due diligence and M&A case?

Vlad replied on 07/07/2018
McKinsey / Accenture / Got all BIG3 offers / More than 300 real MBB cases / Harvard Business School

Hi,

Let me formulate it differently. You may have 2 types of M&A cases:

  1. Due diligence
  2. Synergies calculation

In both types of cases, the Buy Side can be

  1. PE
  2. Another company

e.g. the PE may buy a standalone company to sell it in 5 years or the PE can buy a manufacturer because it already has the supplier in the portfolio and wants to achieve the synergies. Similarly, an airline can buy another airline to achieve the synergies.

The differences for the PE cases are the following:

  1. In the clarifying questions, I would ask "What are the portfolio strategy and the exit timeline for the PE company?
  2. For due diligence in the PE case, I will add "Feasibility of exit" bucket, if it's the main objective of the PE fund.

Pls find the relevant structures below:

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

  • 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)

Good luck!