Welcome back to the last in our series on breaking down case interview frameworks. You’ve almost made it to the end of our series! By the end of this article, you’ll be well on your way to becoming an M&A case framework master.
Missed out on Parts 1-3? Have no fear! Check out our breakdowns onProfitability, Market Sizing, andMarket Studyto become a complete expert on any kind of framework you’ll need in your case interview.
Without further ado, here we go!
4 – Mergers and Acquisitions
These cases can be some of the scariest because they test things like finance principles, but on the other hand, they’re really easy to recognize. The most important part of an M&A question is knowing what type of acquirer you are dealing with. All acquirers will want to increase cash flow, but the length of their investment in the company will differ, depending on the type.
– Financial Acquirer, like a PE firm
They will own 100%, usually in the hopes of selling the company for a significant return. They will often just want to rapidly decrease costs and increase top-line revenues and profits with cash injections.
– Financial Investor, like a hedge fund
They will own a non-majority share, in the hopes of positively affecting the value of the shares before selling them on at a higher price than they originally purchased them for.
– Corporate Acquirer, like a multinational firm
They will own 100% of the target company. They often plan to operate it for a period of time; many choose to integrate the target with their current operations.
How to use the Mergers and Acquisitions framework:
Remember, most interviews are going to be focused in on due diligence strategy as to whether or not one company should buy another. This comes down to 4 key areas:
– The Market
Is it growing? Flooded with competitors? Most investors do not want to buy a company that is in an unattractive market. The question you want to ask yourself is whether or not the market is big enough for your client’s ultimate goals.
– The Company
The client wants to make sure they’re picking the right company within the right market. Once again, it all comes down to finances. Does the company have strong profits? Are they well positioned against competitors? Is it a top performer with revenue growth, or does it have room for improvement with potential for a significant market share in its field?
– Post-acquisition strategy
This ties the first two together, while also sending the message that once the company is bought, things are going to change. The market and the company valuation help you figure out how much you should pay, while the post-acquisition strategy helps you figure out how much you can make over time.
Can you grow revenues/decrease costs? If your client wants to integrate the target, is there potential for synergy, either by piggybacking one company’s strong areas onto the others to increase sales or by reducing operating costs?
– Risks and benefits
The one thing that is really difficult to determine is how you value intangible assets, such as Intellectual Property or the strength of the management team. In consulting cases, you often have to pick scenarios and use numbers to identify what the likely outcomes may be. If there are risks, what would the worst scenario be? What would the medium scenario be? What would the best case scenario be?
For example, how much of a risk is it to integrate two different sales departments, each of which with its own bonus structure? Will governmental regulations hinder the buying process? Risks and benefits are the way to quantify some of the intangible issues that go into purchasing a case.
Recommendations for M&A are also the easiest to put together because you’re either for it or against it. If you are for it, make sure you put together a mind-blowing post-acquisition strategy. If you aren’t, make sure you lay out your reasons clearly, concisely and confidently.
Again, use structure to identify the 3-4 key issues you want to evaluate. Once you’ve created a structure both mentally and verbally, navigate through it step-by-step and support each bucket with data.
Mergers & Acquisitions (M&A) are often an answer to broader problems during case interviews
Merger & Acquisition cases are best practiced using mock interviews
Many growth strategy case studies eventually lead to M&A questions. For instance, companies with excess funds, searching for ways to grow quickly might be interested in acquiring upstream or downstream suppliers (vertical integration), direct competitors (horizontal integration), complementary businesses or even unrelated businesses to diversify their portfolio. The most important requirement for an M&A is that it must increase the shareholders' value and it must have a cultural fit even when the decision financially makes sense.
Analogous to making a purchase at a grocery store, M&A can be viewed as a "buying decision". In general, we know that a consumer first determines the "need" to buy a product followed by analyzing whether he or she can afford the product. After analyzing the first 2 critical factors, the consumer might look at long/short term benefits of the product. Applying similar logic in M&A cases:
- Why does the company want to acquire ?
- How much is the target company asking for its purchase price & is it fair (see cost-benefit analysis)? Can the acquiring company afford to pay the valuation? Financial valuation will generally include industry & company analysis.
- Benefits - potential synergies.
- Feasibility and risks (cultural and economical).
Key areas to analyze: assets, target, industry, and feasibility
When you are sure that it is an M&A case, proceed with the following analyses after structuring the case as discussed above:
Analyze the client’s company
- Why does the client want to acquire? Potential reasons could be the following:
- (a) Strategic (market position, growth opportunities, diversification of product portfolio)
- (b) Defensive (acquisition by another competitor could make the competitor unconquerable)
- (c) Synergies/value creation (cost saving opportunities such as economies of scale, cross-selling, brand)
- (d) Undervalued (ineffective management, unfavorable market, and the client has the power to bring the target company to its potential value)
- In which industry does the client operate?
- Which other businesses does the client possess? Lookout for synergies?
- What are the client’s key customer segments?
Analyze the target industry
Once it's clear why the client is interested in acquiring a particular company, start by looking at the industry the client wants to buy. This analysis is crucial since the outlook of the industry might overshadow the target's ability to play in it. For instance, small/unprofitable targets in a growing market can be attractive in the same way as great targets can be unattractive in a dying market.
Potential questions to assess are:
- Can the market be segmented and does the target only play in one of the segments of the market?
- How big is the market?
- What are the market’s growth figures?
- What is the focus? Is it a high volume/low margin or a low volume/high margin market?
- Are there barriers to entry?
- Who are the key competitors in the market?
- How profitable are the competitors?
- What are possible threats?
Use Porter's Five Forces as a suitable framework here. You should use it without ever mentioning Porter's name.
Analyze the target company
After analyzing the target industry, understand the target company. Try to determine its strengths and weaknesses (see SWOT analysis) and perform a financial valuation to determine the attractiveness of the potential target. You are technically calculating the NPV of the company but this calculation likely is not going to be asked in the case interview. However, having the knowledge of when it is used (e.g., financial valuation) is crucial. Analyze the following information to determine the market attractiveness:
- The company’s market share
- The company’s growth figures as compared to that of competitors
- The company’s profitability as compared to that of competitors
- How can current businesses from the client leverage revenues and profitability from the business to be acquired (keyword synergies)?
- Does the company possess any relevant patents or other useful intangibles (see Google purchasing Motorola)?
- Which parts of the company to be acquired can benefit from synergies?
- The company’s key customers
Analyze the feasibility of the M&A
Finally, make sure to investigate the feasibility of the acquisition.
Important questions here are:
- Is the target open for an acquisition or merger in the first place? If not, can the competition acquire it?
- Are there enough funds available (have a look at the balance sheet or cashflow statement)? Is there a chance of raising funds in the case of insufficient funds through loans etc.
- Is the client experienced in the integration of acquired companies? Could a merger pose organizational/management problems for the client?
- Are there other risks associated with a merger? (For example think of political implications and risks of failure, like with the failed merger of Daimler and Chrysler.)
You should now be able to evaluate the venture’s financial and qualitative attractiveness for the client. If you conclude that the client should go on with the M&A, make sure to structure your conclusions in the end. Your suggestions should also include:
- potential upsides of the merger
- potential risks and how are we planning to overcome/mitigate them
Keen on cracking an M&A case now? Have a look at Chip equity or General holding