August 2013
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Month August 2013

M&A—invest with a thesis…

Successful acquirers begin with an investment thesis, a statement of how a particular deal will create value for the merged company. The most compelling investment thesis is one that explains why and how an acquisition stands to improve the existing core business.

Remember: Merger strategy is inseparable from business strategy. Before you can create an investment thesis, you need to understand the basis of competition in your industry—basically, how your businesses make money and how they compete. Most companies compete primarily on the basis of cost position, brand power, consumer loyalty, real asset advantage, or government protection. The best acquirers know their core strengths and target deals that enhance those strengths.

Now, what steps should you take to identify appropriate targets and define deals that make sense for your organization?

  • Determine your basis of competition
  • Rationalize the core, exiting businesses that don’t reinforce it
  • Identify potential targets
  • Develop a sound investment thesis for each target
  • Develop good relationships with your targets
  • Focus on the right size deals and the right frequency

The message here: Do your homework, long before you approach acquisition candidates. Develop a sound investment thesis, based on a clear growth strategy and a thorough understanding of your basis of competition.


Quick Tip

Build your due diligence valuation process around two critical steps (once you have completed and vetted your investment thesis):

  1. Determine the target’s stand-alone value based on a rigorous understanding of cash flows. Your due diligence process must first establish a baseline—that is, your target’s value under “business as usual” conditions. Key: Most of the price you’re paying should reflect the business as it is, not as it may be after you own it.
  2. Measure the true value of synergies. 1) Begin by evaluating cost savings, then 2) move out to revenue synergies and account for the probability of success as well as the time required to achieve them, and finally 3) assess negative synergies—such as interruptions to service, lost customers and employee turnover, and subtract these item values from your overall estimate.

Finally, throughout the due diligence process, test what you’re learning against predetermined “walk-away” criteria (i.e., criteria that indicate the acquisition does not make sense…). If any of those tests leads to irreconcilable doubt—walk away from the deal.

The Four C’s

Quick Tip

For a revenue officer…, the Four C’s (i.e., things to always keep your eyes on):

  1. Customers
  2. Competitors
  3. Costs
  4. Capabilities

Further, keep market maps (size, growth rates), define where to compete and how to win, know industry pricing, track customer/product profitability, quantify customer loyalty, monitor your firm’s relative cost position, and make sales systems assessments an ongoing priority.