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The Art and Science of M&A

Posted on June 18, 2018 in Uncategorized

The year 2008 witnessed a total of only, $2.89 trillion in the name of global M&A volume. This annual figure of M&A deals is the lowest since 2005. On the other hand, the number of failed M&A deals seem to be on a rapid rise. Most experts blame the heightened ‘scrutiny’ involved in the M&A valuation and due diligence process as the cause for the low global merger volume. However, 2009 proves that most of 2008’s “scrutinized” deals have converted well in the year. Therefore, the fault lies elsewhere.

The reason behind the fall in M&A activities is not the intense scrutiny that the deals are begin subjected to, but in fact the lack of understanding of both the science and the art of these deals. While most experts seem to pay great attention to the value calculations of an M&A deal, the creative aspect tends to take a back seat. These economic times indicate that creativity is no longer an advantage in the business world, but rather an absolute necessity. It is therefore critical to the success of any M&A transaction that all parities concerned understand the scientific formulas involved along with the peculiarities of a deal that demand special handling.

Be it a hostile takeover or friendly one, there is no doubt that mathematical logistics play a huge role in an M&A deal. However, intertwined in these formulas is the subjective solution, which demands a more creative approach.

A few such aspects are discussed below:

  • Acquisition cost – The “price” of the target company is one of the most essential calculations in an M&A deal, but this is only part of the acquisition cost. These are several issues involved in the process from the weighted average cost of capital (WACC) to the cost of equity, everything contributes towards calculating the acquisition cost. To make matters more complicated, these calculations differ from private to public sectors due to rate of interest, as well as tax exemptions. All in all, it would be safe to say that calculating the acquisition cost is definitely a scientific aspect of an M&A deal and requires professionals of a high caliber to get the job done. However, these calculations do not follow a rigid path and need to be altered according to situations. This alteration of the basic formulas is an art rather than a science.
  • Valuation – Once more, most parties depend on the formulas only, when undertaking a valuation of the company. While the intrinsic value maybe more easily calculated by balance sheets and other similar tools, the relative value involves a personalized approach and therefore is more of an art than a science. Needless to say, that both aspects must be adhered to when seeking the perfect solution
  • Buyer selection – Choosing which buyer is most suitable for a particular seller is not simply a matter of looking at the highest offer price. Analyzing the suitability of a buyer, requires complex study of the company being sold, the seller’s expectations, etc and therefore demands an M&A intermediary of great experience and knowledge to undertake the task. While the offer price will play an intrinsic role here, the buyer’s intentions must collaborate with the sellers plans too.
  • Time to sell – Laws of the land change all the time when figuring out when the time will be most lucrative to sell, is not a matter of calculations alone. Keeping abreast of the latest in the industry and having knowledge of laws that are in the pipeline is essential when calculating the most suitable time to sell. Again the obvious mix of formulas with the artistic nature ‘gut feelings’ is obvious here
  • Hiring appropriately – Hiring brokers and banks is a common practice for those undertaking M&A deals, however keep in mind that not everyone is capable of handling each project. Always hire keeping in mind, sector relevance along with of course the size of the deal. Over and above obvious factors such as credibility, confidentiality and efficiency, it will help to work with licensed brokers rather than not. Do not make the fatal mistake of depending only on your lawyers to undertake the deal. As explained above, successful M&A deals require a creative understanding of the situation, which maybe outside of your lawyers capacity.

The art behind an M&A deal is what sets apart success from failure. Do not hesitate to scrutinize, irrespective of whether you are a buyer or a seller.