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Analyzing M&A Opportunities & Determining Value

"The Big Idea: The New M&A Playbook," published by the Harvard Business Review, explains why the majority of acquisitions fail and how business buyers can ensure a higher chance of success by adopting the right approach to analyzing M&A opportunities.

"Some managers hold out hope that buying another company for its resources can unlock unexpected growth, but they are likely to be disappointed."

"If managers grow cash flows at the rate the market expects, the firm’s share price will grow only at its cost of capital, because those expectations have already been factored into its current share price. To persistently create shareholder value at a greater rate, managers must do something that investors haven’t already taken into account—and they must do it again and again."

"The most reliable sources of unexpected growth in revenues and margins are disruptive products and business models. Disruptive companies are those whose initial products are simpler and more affordable than the established players’ offerings."

"Given our assertion that RBM acquisitions most effectively raise the rate of value creation for shareholders, it’s ironic that acquirers typically underpay for those acquisitions and overpay for LBM ones... The stacks of M&A literature are littered with warnings about paying too much, and for good reason. Many an executive has been caught up in deal fever and paid more for an LBM deal than could be justified by cost synergies. For that kind of deal, it’s crucial to determine the target’s worth by calculating the impact on profits from the acquisition."

"Ultimately, the “right” price for an acquisition is not something that can be set by the seller, far less by an investment banker looking to sell to the highest bidder. The right price can be determined only by the buyer, since it depends on what purpose the acquisition will serve."

Read the full article in the Harvard Business Review.

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