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Mand a toolkit   value hypotheses Mand a toolkit value hypotheses Presentation Transcript

  • M&A TOOLKIT Strategic Fit: Value Hypotheses© 2007-2013 IESIES Development Ltd. All Ltd. Reserved © 2007-2013 Development Rights All Rights Reserved
  • VALUE HYPOTHESIS: HOW WILL 1 + 1 = 3? © 2007-2013 IES Development Ltd. All Rights Reserved
  • Every deal will have a “hypothesis” about value creationWAYS TO CREATE VALUE IN M&A 1) Target is under-valued by owners •Distressed sale •Stock market imperfect •Unsophisticated seller Private Equity 2) Target is under-managed •Poor management incentives focus •Non-core business •Wrong CEO 3) Synergy: Reduced costs •Elimination of overlaps •Economies of scale •Overheads •Purchasing Corporate focus 4) Synergy: Increased revenue •Selling new products to existing customers •Selling existing products to new customers •Improved processes 5) Financial Engineering •Reduced cost of capital Private •Cash tax reduction Equity focus © 2007-2013 IES Development Ltd. All Rights Reserved
  • The Value Hypothesis lays out how the bottom line will be boosted post-dealVALUE HYPOTHESIS FOR DIAGEO BUYING SEAGRAMSStrategic rationale Achieve a competitive advantage in distributionfor Seagrams deal: and lowest distribution cost position in the USAValue Hypothesis: “Increase growth by 2% per annum and increase our margin by 1% by creating a proprietary salesforce within distributors” What analysis can you do to justify this hypothesis before launching the bid? How can you test this assumptions further in due diligence? How will you realise the value in post-merger integration? © 2007-2013 IES Development Ltd. All Rights Reserved
  • Good Value Hypotheses pass three testsCHECKING YOUR VALUE HYPOTHESIS 1) Links directly to the strategic rationale (no Bait n’ Switch!) 2) Quantifed/Testable/Analysable 3) Specifies the Action in merger integration to realise the value Only one (other synergies are icing on the cake) © 2007-2013 IES Development Ltd. All Rights Reserved
  • Good Value Hypotheses pass three testsEXAMPLES OF VALUE HYPOTHESESDeal Possible Value Hypothesis Strategic Quantified Describes Fit PMI actionVolvo-Geely Increase Volvo sales in China to 100k cars by 2016 through Geely’s distribution network and relationshipsTata Steel- Reduce costs 5% through overheadCorus reduction and plant rationalisationAOL-Time Create $20 billion in new businessWarner revenues from combining TW media content with AOL’s distribution platformInstagram- Increase mobile advertising revenue byFacebook 50% in year 2014 through integrating functionality and cross-selling platforms © 2007-2013 IES Development Ltd. All Rights Reserved
  • THE“NATURAL OWNER” OF A BUSINESS © 2007-2013 IES Development Ltd. All Rights Reserved
  • The “Natural Owner” question is the toughest valuation test for screening acquisitions“NATURAL OWNER” VALUATION TEST • It is not enough to identify a robust “value hypothesis” for an acquisition • The toughest test is “can we add more value than any other owner”? • When this is true, you are the “Natural Owner” and can bid confident you will not be outbid rationally © 2007-2013 IES Development Ltd. All Rights Reserved
  • The “Natural Owner” of a business is the owner who can realise the highest synergies from the business 90 BUSINESS VALUE ($m) 75 Synergy 30 Value 60 15 Base Business ValueValue to old owner Value to us Value to another company “Natural Owner” © 2007-2013 IES Development Ltd. All Rights Reserved
  • If we are not the “Natural Owner” of a business, approaching it risks a bidding war with a temptation for us to overpay 90 BUSINESS VALUE ($m) The “Natural 75 Owner” can 30 Synergy rationally outbid Value us once the target 60 15 is put “in-play” Base Business ValueValue to old owner Value to us Value to another company “Natural Owner” © 2007-2013 IES Development Ltd. All Rights Reserved
  • The “Natural Owner” test should be applied to businesses we already own, to identify when value can be created by selling a businessVALUE CREATION OPPORTUNITY FROM SELLING A BUSINESS 90 Potential value creation opportunity from selling to the 60 “Natural Owner” Value to us Value to other company © 2007-2013 IES Development Ltd. All Rights Reserved
  • Businesses should evaluate their portfolios and sell businesses to their “natural owners”IDENTIFYING THE “NATURAL OWNER” • Is there a strategic story (e.g. Consolidation, Roll-up, Market entry, Product range extension, Technology)? • What are the possible Value Hypotheses? o What costs could be cut? o What cross-selling opportunites exist? • Do they have the financial strength to buy? • Do they have an appetite for this kind of acquisition? If YES How can we position our business to get a good price? How can we create a strong negotiating process? © 2007-2013 IES Development Ltd. All Rights Reserved