Should PE firm buy a company

Question

When looking into the financial aspects of whether a PE firm should buy a company..apart from looking at the target company's profitability, we should consider the additional revenues or cost-savings that could be generated because of the firm's operational expertise..can we call it "synergies" here? Or can that term only be used in the case of company mergers?

Answer 1

Hi there,

Synergies can only exist between two entities!

So, you can only use synergies if this PE firm is explicitly looking to acquire multiple companies and combine them. Otherwise, you cannot have a synergies bucket.

That said, you can have a bucket on "turnaround value" or "added value", which is essentially anything we can do to change the company to add value that isn't already there (bring in capital to expand it, split it into multiple entities, embark on cost cutting measures, change prices, etc.)

Answer 2

No, synergies are actually only the increased revenue or decreased costs after a merger or intergration.

In a PE context, you can speak about a value creation plan: This covers all the value creation levers that a PE fund can pull to drive valuation of the asset. For example:

Increase sales effectiveness
Improve production processes
Reduce overhead costs
etc...

Hope this helps.

Btw: In PE cases you will typically also look at more than the revenue & costs of a company. You'll also need to look at the market, competition and customers to identify any major risks or red flags (e.g. strong customer concentration, competitors buying market share rapidly, threat of substituion, etc...)

Answer 3

I would just call it "value creation". Synergies are more in the case of a merger with another company.

Answer 4

Disagree with most of the people here TBH. I work in a PE fund and we look at synergies with portfolio companies (and with the fund itself) all the time.

The definition of synergy is that there is a positive or negative value when you calculate the valuation of an entity and when you compare it with the valuation of the sum of the parts

Example of positive synergies in this case can be reducing operating costs because the PE owns a company that produces the same input the target uses, and thus can be procured with a discount.

Example negative synergies include most strict (from the PE side) regulations that the target just adhere and doesn't at the moment. For example, when Cargill buys a company, it must adhere to the whole sustainability framework that Cargill adheres, and is costly when compared to adhering to the minimum FDA framework

Hope it helps