Which frameworks to use for M&A vs. PE-fund investment cases?

Question

Hi guys,

so, I understand the difference between an M&A and an investment made by a PE fund (both quite common case types).

But I struggle with finding the right framework for those two types, means often I see no difference between the framework used for an M&A vs. a PE fund case. Sometimes I treat them as identical for this reason.

Any suggestions from experts?

Answer 1

Hi,
one of the most important aspects to stress in an M&A will be the revenue and cost synergies of the 2 companies.

During a PE investment instead will be crucial to investigate the ability of the target company to increase - in the short-middle term - profit and value. Then, you can think even on synergies with the other firms in the portfolio.

Best,
Antonello

Answer 2

By and large, M&A and PE cases are very similar, but there are differences:

Similarities: In both situations, the client considers buying an asset, so you need to assess the asset itself. Meaning market, competitors, positioning with taylored focus in your framework based on the case context and your own experience (if applicable) with the industry.

Differences: The key difference between M&A and PE is what your client does with the asset after the acquisition. While there are PE funds that have a portfolio approach and could have in mind to merge the asset withe one of their competitors, this is an exception rather than the rule. Typical post-acquisition strategies are include revenue growth or cost reduction from within (new sales approach, new product line, cutting administrative slack, etc.). The key question is: "What can you do with this company to make it more valuable?"

In an M&A setup, this is just the oppositve. Most corporate buyers buy the target with a very specific strategic vision: revenue or cost synergies with the existing business, complimenting customer segments, strategic market entries, etc. Key question here is: "Why is this company worth more to your client than to anybody else?"

In any of these cases, your framework should address the post acquisition (or merger) strategy, and it should identify the key issues upfront based on the context you get from the interviewer.

Answer 3

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:

Commercial due-diligence of the target company
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:

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.)
Cost synergies - typically you use a value chain structure tailored to the industry (e.g. supply-production-distribution-marketing-after sales support)
Financial synergies - working capital, capital structure, tax (can be neglected in consulting cases)
Risks - major risks that can decrease the synergies (tip: don't underestimate the merging companies culture factor)
Total synergies potential in $, adjusted by risk (probability of failure)

Good luck!

Answer 4

Hi there, and thanks for asking, Indeed, setting up the framework for a profitability case can be a bit confusing, ho... (read entire answer)

Hi there, and thanks for asking, Indeed, setting up the framework for a profitability case can be a bit confusing, however, I would advise you not to think of “THE” framework wh... (read entire answer)