Which part should I focus in a M&A case?

Hi,

In consulting interviews you may have two types of due diligence cases:

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

There are two ways to identify the exact type of a case:

• The interviewer will tell you
• In the beginning, while asking clarifying questions you ask what is the objective and if we have any other company in the portfolio that can have potential synergies

1. For commercial DD 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 valuation and multiples
• Exit time
• Existence of potential 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!

Hi Peter,

I agree with Vlad, the way to clarify where to focus would either receive the information directly from the interviewer, or simply ask at the beginning why the client wants to buy this company.

In general, in an M&A case you should cover the following points:

1. Market
   1. Key numbers and barriers
      1. Growth
      2. Size
      3. Barriers to entry
   2. Key players
      1. Customer segments
      2. Competitors
      3. If relevant: suppliers and substitutes
2. Company
   1. Can we reach our goal (profits, revenues, mkt share) with this specific acquisition?
   2. Synergies (including culture) and cannibalization risks
3. Feasibility
   1. Is the price fair
   2. Do we have enough money/capabilities
4. Risks/next steps
   1. Operation risks, including exit strategies
   2. Are there other alternatives we should consider before completing the acquisition

With this structure you could cover both the potential goals you mentioned. With the first (synergy focus) you would concentrate more on Area 2, with the second (marketplace/product) more on Area 1. You should still present all the areas when presenting the structure though (mentioning your priorities), unless the interviewer explicitly said that, say, we are not interested in the price. After that, the interviewer will likely ask you to concentrate in one area (or you could take initiative to prioritize the one fitting more the goal).

There is a very important thing to remember in order to optimize your communication with this framework: you should always refer to the goal when explaining why you want to cover an area. Eg., if you goal is synergies, don’t say “I want to look and size, growth and barriers to entry to understand if the market is attractive”. Rather “I want to look and size and growth to understand how sustainable may be potential synergies in this market in the future, and barriers to entry to assess whether we could enter at all in this market to benefit from these synergies”. In this way it would not sound you have memorized a structure, rather that you are personalizing your approach towards the client’s goal.

Best,

Francesco