M&A case framework
Now that you have a high-level understanding of why companies buy each other in the first place (refer to M&A deals – benefits and drawbacks), let’s discuss the framework you should use to analyze the transaction.
Firms typically look at four areas when working on M&A cases. Let’s step through them one by one and list the questions you’d want to answer in each.
1. The market
The first area consultants typically analyze in M&A cases is the market. This is extremely important because a big part of the success or failure of the acquisition will depend on broader market dynamics. Here are some of the questions you could dive into:
- Are both companies (buyer / target) in the same markets (e.g. geographies, customers, etc.)?
- How big is the market? And how fast is it growing?
- How profitable is the market? And is its profitability stable?
- How intense is the competition? Are there more and more players? Are there barriers to entry?
- How heavily regulated is the market?
2. The target
The second important area to analyze is the company you are thinking of acquiring (i.e. the target). Your overall objective here will be to understand how attractive it is both financially and strategically.
- What is the current and future financial position of the target? Is it under / overvalued?
- Does the target own any assets (e.g. technology, brands, etc.) or capabilities (e.g. manufacturing know-how, distribution channels, etc.) that are strategically important to the buyer?
- What’s the quality of the current management? Do we believe we can add value by getting control and running the company better?
- Is the target company’s culture very different? If so, are we confident it could still integrate well with the buyer?
3. The buyer
The third area consultants typically analyze is the buyer (i.e. the company buying the target). It is important to have a good understanding of what’s motivating the purchase of the target and whether the buyer has adequate financial resources.
- What’s the acquisition rationale? Undervaluation, control, synergies or a combination?
- Can the buyer easily finance the acquisition? Or will it need to borrow money?
- Does the buyer have any experience in integrating companies? Was it successful in the past?
- Is this the right time for the buyer to acquire another player? Does it risk losing focus?
4. Synergies and risks
The last area to analyze is the synergies and risks related to the acquisition. This is usually the hardest part of the analysis as it is the most uncertain.
- What is the value of the individual and combined entities?
- Are there cost synergies (e.g. duplication of roles, stronger buying power, etc.)?
- Are there revenue synergies (e.g. product cross-selling, using one company’s distribution channels for the other company’s products, etc.)?
- What are the biggest risks that could make the acquisition fail (e.g. cultural integration, regulation, etc.)?
It is almost impossible to cover all these aspects in a 30-60 minutes case interview. Once you have laid out your framework, your interviewer will typically make you focus on a specific area of the framework for the rest of the case. This is usually the market, or the target company, but can sometimes be the other two points.
M&A Case Examples
Ok, now that you know how to analyze M&A situations, let’s step through a few real life examples of acquisitions and their rationale. For each example, you should take a few minutes to apply the framework you’ve just learned and try to identify the driving reason for the M&A. Once you have done that, you can then read the actual acquisition rationale.
1. IBM Acquisition
- Situation #1: At the beginning of the 2010s, IBM went on an acquisition spree and purchased 40+ companies over 3 years for an average of $350 million each. All these companies had smaller scale than IBM and slightly different technology.
- Rationale: The main reason IBM decided to buy these 40+ companies is that they could all benefit from the firm’s global sales force. Indeed IBM has a presence in the largest software markets in the world (e.g. North America, Europe, etc.) that smaller companies just don’t have. IBM estimates that thanks to its footprint it could accelerate the growth of the companies it purchased by more than 40% over the two years following the acquisition in some cases. This is a typical revenue synergy resulting from the buyer’s ability to use its distribution channels.
2. Apple Acquisition
- Situation #2: In 2010, Apple decided to buy Siri, its now famous voice assistant. And in 2014, it decided to purchase Beats Electronics which had just launched a music streaming business. Both acquisitions were motivated by similar reasons.
- Rationale: In both the Siri and Beats cases, Apple had the capabilities to develop the technology / product it was purchasing itself. It could have built its own voice assistant, and its own music streaming business. But it decided not to. The reason they thought it would be better to buy a competitor is that it was going to enable them to offer these solutions to their customers more quickly. To be more precise, they probably estimated that launching these products more quickly was worth more money than the savings they would make by developing the technology on their own. This is a typical revenue synergy that’s widespread in the technology space.
3. Volkswagen, Audi, and Porsche Merger
- Situation #3: Volkswagen, Audi and Porsche have been combined companies since 2012. Mergers are common in the automotive industry and usually motivated by a central reason.
- Rationale: The cost to develop a new car platform is high. It takes years, hundreds of people and millions of dollars. By belonging to the same group, Volkswagen, Audi and Porsche can share car platforms and reuse them for different models with different brands. This is a typical cost synergy.
Jason Oh is a management consultant at Novantas with expertise in scaling profitability and improving business efficiency for financial institutions.
Image: Pexels
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