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M&AMarch19981BainM&AObjectives
IntroductionThepurposeofthismoduleistoallownewACsandConsultantsto:obtainabackgroundunderstandingofM&AunderstandwhatBaindoes/doesn’tdoinanM&AprojectreviewbasicanalyticaltoolsrequiredindifferentM&AprojectsatBaindevelop,throughanexercise,animportantbasicanalyticalskilloftenusedinM&Aprojects2BainM&AAgenda
IntroductionTrendsinM&AGuidingPrinciplesforSuccessfulM&ABainApproachCaseExamplesscreeningduediligencesaleExerciseonSynergyCalculationTypicalWatchoutsKeyTakeaways3BainM&AAgenda
IntroductionTrendsinM&AGuidingPrinciplesforSuccessfulM&ABainApproachCaseExamplesscreeningduediligencesaleExerciseonSynergyCalculationTypicalWatchoutsKeyTakeaways4TrendsFPECG8030601DriversofM&AActivityBainM&AEconomyboomorrecoveryOver-capacityinanindustryCheapmoneyIndustryconsolidationGlobalizationStrategicFinancialOtherGainshareEliminatecompetitivethreatCaptureoperatingopportunities,e.g.,scaleefficienciesLeverageexistingbusinesssystemsforward/backwardintegrationstart-upalternativeDiversify/balanceportfolioRetireexcessindustrycapacityGreedEgoImprovecapitalmarketsevaluationofacquirermeetgrowthtargetsreduceportfolioriskInvestidlecashMacro-economics5M&AActivity-U.S.vs.Europe$BEuropeUSCAGR(1992-1997)21%41%EuropeanandUSM&Aactivityisexperiencingsimilarpositivetrends.Note: TransactionValue(includingNetDebtofTarget).Excludessplit-offs.Europeincludes50majorcountriesSource: SDCTrendsBainM&A6M&AActivityM&Aactivityhasgrownrapidlyinnominaldollarterms,peakingintheU.S.inthelate1980s,andthenmatchingthoselevelslastyearTheferociousmergeractivityofthelate1980swasdriveninlargepartbythe“easymoney”affordedbythejunkbondmarket.Thisresultedinhuge,oftenunsubstantiated,premiumsbeingpaidforcompanieswithoutregardtothevaluecreationopportunitiespresented(ornotpresented,asthecasemaybe)bytheoperations/underlyingbusinessofthetargetGrowthinmergeractivitysince1992hascoincidedwiththeeconomy’srecoveryfromrecessionRecentM&Aactivitybenefitingfrom:extendedeconomichealthwithlittlerecessionarypressureonhorizonaresultingcorporatedemandforgrowthincreaseininternationalM&AactivityascompaniespursuingglobalstrategiesSincelate1997,U.S.andEuropeanmarketshaveexperiencedtheresurgenceofjunkbondstofacilitatetheexecutionofdealsgettinglargerandlargerTrendsBainM&A7BainM&AM&AActivitybyCountry1996/97Note:RepresentsannounceddealsSource:SDCUSmarketdominatestheglobalM&Aactivity.TrendsPercentchange:50%41%110%31%50%14%79%57%8
TrendsUSM&AActivitybySellerIndustry(1992-97)Source:SDC(March98)Valueandvolumeoftransactionsvaryacrossindustries.Forexample,intheUS,computersoftwareandserviceindustriestendtodomanysmalldeals.Telecommunications,broadcastingandleisureandentertainmenthavehightransactionsize.AggregateOfferedValue($BN)(bars)Transactions(line)Banking&financeTelecommunicationsBroadcastingBusinessServicesLeisure&EntertainmChemicals&DrugsInsuranceRetailHealthServicesElectronic,ElectricOil&GasUtilitiesMeasuring,Medical,FoodProcessingAerospace&AircraftOfficeEquipmentPrepackagedSoftwareMiscellaneous010020030040050002,0004,0006,0008,000BainM&A9Trends
MultiplesPaidforAcquisitions
Sources:TheBUYOUTSYearbook,BainAnalysis.Overthelastfiveyears,thepricespaidforacquisitionshavebeenincreasing,andreinforcestheneedforin-depthduediligenceandanalysistoensureafairprice.AverageEBITMultipleBainM&A10TrendsAcquisitionSuccessRatesHarvardBusinessSchoolSurveyofCFOsLondonBusinessSchoolBain&CompanyStudyPercentofAcquisitionsFailing*inFirstFiveYearsPercentofTotalThemajorityofacquisitionshavebeendeemedfailures.Notes:Failuredefinedasearningslessthancostofcapitaland/orsubsequentlydivested.
BainM&A11CommonReasonsforFailurePoorstrategicfitcombinationdoesnotprovidecompetitiveadvantagelackofunderstandingofthebusinessOverpayimperfectinformation/wrongvaluationtoooptimisticinforecasts/synergiesunforeseenindustrydownturn/emergingtechnologyauctionenvironment;failuretoset/stickto‘‘walkaway’priceCEO/fitabilityemotionvs.analysisPoorpostacquisitionintegrationinadequateplanningfailuretoexploitrevenue/marginpotentialdisruptedrelationswithcustomers,employersandsupplierscultureclash;failuretoinvolve‘acquired’peopleStrategic,financialandoperatingcausesTrendsBainM&A12GlossaryTrendsCreditRatingThelegalcombinationoftwo(ormore)formerlyindependententitiesTheacquisitionbyanindependententityofacontrolstakeinanotherentity.Thisisusuallyachievedbyacquiringmorethan50%ofsharesforapubliccompanyThesaleorclosureofaparticularentityLeveragedbuy-out:Anacquisitionmadepossiblefinanciallybylargeissuanceofdebt,makingthenewentityhighly““leveraged”or““geared”(i.e.,withahighratioofdebttoequity)InvestmentfirmsmanagingprivatefundsbyrunningbusinessportfoliosBonds(ordebentures,orcoupondebt)issuedbyanentitywithoutacreditratingorwithentitieswith“non-investmentgrade”ratingFinancialmarketsusetheserviceofcreditratingfirmssuchasStandard&Poor’sandMoody’stodetermineentities’creditworthiness(i.e.,theabilityforanentitytopaybacktheirdebt).RatingsareallocatedfromAAAorAaa(highest)toC(lowest)EntitieswithInvestmentGradeRatings(AAAdowntoB)areconsideredstablenon-investmentGradeentities(belowB)presentaninvestmentrisk(e.g.,thirdworldcountries,highlyleveragedcompanies)MergerJunkbondsAcquisitionDivestitureLBOPrivateEquityFirmsBainM&A13BainM&AAgendaIntroductionTrendsinM&AGuidingPrinciplesforSuccessfulM&ABainApproachCaseExamplesscreeningduediligencesaleExerciseonSynergyCalculationTypicalWatchoutsKeyTakeaways14PrinciplesGuidingPrinciples(1of2)Bainbelievesthataclearanddisciplinedapproachtotheacquisitionprocessisvitaltoensuresuccess.Principles:AcquisitionsaremadetoimprovethestrategicpositionofexistingbusinessesoraddtothecorecompetenciesofthecorporationAssessimpactofacquisitionsonlong-termshareholdervalueUseacquisitionasavehicletoaccelerategrowthinkeybusinessunitsActivities:ProactiveStrategicThinkingScreeningLookforallcompaniesthatpotentiallystrengthenthecorporationDon'tallowa"transaction"mentalitytodominatetheprocessLookfortargetsthatpresentbestfitintermsof:relatednessimpactonmarketpositionExaminekeysuccessfactorsofpotentialtargetsEpetitivebiddersDefinebusinesssegmentsDiagnosekeycompetenciesandanyskillgapsAnalyzemarketdynamicsStudycostofacquisitionversusorganicgrowthBainM&A15PrinciplesGuidingPrinciples(2of2)Bainbelievesthataclearanddisciplinedapproachtotheacquisitionprocessisvitaltoensuresuccess.Principles:Activities:ExecutionCaptureFullValueMakebetterdecisionsupfrontthroughcarefulduediligenceStrivetoidentify"dealbreaker"issuesasearlyaspossibleUseinformationandinsightstoprovideconfidenceinmakingabidClearlycommunicatecorporatevisiontotargetBeginintegrationprocessasearlyaspossibleBeobjectivetoensureafairdecision-makingprocessCreateasetofshort-termandlong-termobjectivesQuantifyallpotentialsynergiesandcostsavingsExaminemarginandrevenueforecastsEvaluatemanagementoftargetProvideablueprintforcapturingfullpotentialvalueSupportmanagerialintegrationteamBainM&A16PrinciplesStrategyandM&ACorporateobjectivesgrowthandfinancialtargetscompetitivearenaCorporatestrategystrategicpositionmanagementofresourcesBusinessunitobjectivesbusinessdefinitiongrowthandfinancialtargetsBusinessunitstrategystrategicpositionkeysuccessfactorssustainablecompetitiveadvantageOrganicgrowthGrowththroughbusinessunitacquisitionsGrowththroughcorporateacquisitionsAcquisitionsatboththecorporateandbusinessunitlevelneedtobethoughtofasanintegralpartofacompany'sgrowthstrategy.BainM&A17PrinciplesStrategicFrameworkThefocusofstrategicM&Aactivityshouldbeinareaswherethereisthehighestvaluecreationopportunityaswellasthestrongestparentingadvantage.LowLowHighHighParentingAdvantage“Isvaluetoourclienthigherthanvaluetootherparents?”ValueCreationOpportunityFocusBainM&A18PrinciplesM&AValueCreationOpportunitiesBuycheapM&Avaluecanarisefromgeneratingthefullvalueofanundervaluedentityorbyaddingvaluetounderperformingassets.AddvalueTakeadvantageofinefficienciesinthemarketSpotnewmarkettrendsearlyGeneratesynergiesBainM&A19PrinciplesCriticalIssuesResolvingtheseissuesallowsanaccurateevaluationofacompanyCostsharingCustomersharingCompetitoroverlapExperiencesharingStrengthofkeycompetitorsRelativecostpositionStrengthsandweaknessesofacquirerMarketgrowthTechnologychangesProductsubstitutionBarrierstoexitandentrySupplierandbuyerpower(I)Relatedness(II)StrategicStrength(III)MarketDynamics(IV)Value:Bainassimilatesthestrategicprocesswithacquisitionsbyfocusingonfourkeyareas.BainM&A20PrinciplesSuccessCriteria-DiagnosticTool(IV)ValueAccurateevaluationbasedonNPVvs.MarketPrice(II)StrategicStrength(RelativeMarketShare)Relatedness(I)(Experienceand/orCostSharing)Theabilitytoimprovethestrategicpositionoftheacquirer,andgroworcomplementitsexistingcompetenciesarekeystosuccess.RMS>1.5xRMS1.5-1.0xRMS<0.5xLow<25%Medium25-50%High>50%Growth>10%Growth5-10%Growth<5%III)MarketDynamicsBainM&A21PrinciplesSuccessandMarketShareMarketShareBoughtPercentIncidenceofsuccessIncidenceofoutrightfailureAcquisitionsthatincreasedmarketsharesubstantiallywereconsistentlymoresuccessful.Sources:Porter(33LargeU.S.Corps.;ManagementInterviews)BainM&A22MarketImpactofAnnouncedTransactions*PrinciplesThestockmarketrewardscompaniesthatmakerelatedand/orfocusedacquisitions.Definition:Note:*TwoweeksbeforecomparedtooneweekafterannouncementSource:IndustryLiteratureReview,BainAnalysisUnrelatedRelatedFocusedMinimalcostoverlapbetweenacquirerandtargetMediumdegreeofcostoverlapTargetderives>70%ofrevenuesfromsamebusinessasacquirerSignificantamountofactivityandcostoverlapbetweenacquirerandtargetTargetcomplementsexistingproductlineandaddstocorecompetenciesofacquirerAveragePercentPriceIncreasesBainM&A23ExamplesofFailures(1of2)PrinciplesIndustryAcquirerTargetTransactionValueAcquisitionThesisReasonforFailureEntertain-mentSonyMatsushitaColumbiaMCA$4.8B$6.1BOwnupstreamcontentsfordownstreamhardwareInadequateduediligenceovervaluedsynergiesStrategicallyflawedandpoorintegrationFinanceSearsDeanWitter$6.7BBuilda"one-stop"financialsupermarketInadequateduediligencelimitedcross-sellpotentialConsumerGoodsQuakerOatsSnappleInadequateduediligencegrowthcyclenotwellunderstoodbrandstrengthoverestimatedLeveragedistributionchannels$1.7BSources:Industryliterature;BainAnalysis.TheM&Alandscapeislitteredwithunsuccessfulacquisitionswhichfailedtoadheretothecoreguidingprinciples.BainM&AAmexShearson$900MMExpanddistributioncapabilitiesPoorintegrationcultureclash24ExamplesofFailures(2of2)PrinciplesIndustryAcquirerTargetTransactionValueAcquisitionThesisReasonforFailureSources:Industryliterature;BainAnalysis.RetailAlliedFederatedTechnology/
Telecommu-nicationsAT&TNCR$6.5BExpandgeographicallyInadequateduediligenceovervaluedpotentialsynergiesandbrandvalueTechnology/telephonyintegrationStrategicallyflawedfewsynergiesbetweencomputerhardwareandtelephonyPoorintegration$7.5BNewmarketentryNovellWordPerfectPoorintegrationcultureclash$1.4BTheM&Alandscapeislitteredwithfailureswhichfailedtoadheretothecoreguidingprinciples.BainM&A25PrinciplesExamplesofSuccessfulAcquisitions(1of2)IndustryAcquirerTargetTransactionValueAcquisitionThesisReasonforSuccessWellsFargoCrocker$1.07BExpandgeographicalreachandleverageback-officeCarefulduediligenceandintegrationcaptureofsynergiesandcostsavingsFoodTysonHollyFarms$1.4BExtendproductlineGoodstrategicfitandduediligencecaptureofcost-sharingpotentialConsumerGoodsCadburySchweppesDr.Pepper/7-Up$2.0BExpandgeographicdistributionCarefulduediligenceincreasedscaleandpresenceasaglobalplayerFirstFinancialManagementFinancialServicesFirstData$6.6BObtainscaleeconomiesWell-managedintegrationintegrationofcreditcardprocessingservicesofconsumerandcommercialsidesSources:Industryliterature;BainAnalysisHowever,manycompanieshavecreatedenormousvaluethroughsuccessfulacquisitions.BainM&A26PrinciplesExamplesofSuccessfulAcquisitions(2of2)IndustryAcquirerTargetTransactionValueAcquisitionThesisReasonforSuccessHighTechnologyCiscoStratacom$4.5BNewtechnologyWell-managedintegrationcloseattentiontoculturematch;opencommunicationofstrategicvisionManufacturingCrown,Cork&SealCarnaud
(French)$3.9BExpandgeographicreachandleverageproductstrengthsGoodstrategicfitandduediligencestrongunderstandingofmarketdynamictoimprovestrategicpositionTransportationUnionPacificChicago&NorthWesternTransportationCompany$1.1BExpandgeographicallyGoodstrategicrationalepre-emptivestrategicmovetomaintainstrategicpositionSources:Industryliterature;BainAnalysisHealthcareColumbiaHCABuildnationalhealthcaregroupGoodstrategicfitandduediligencecaptureofcost-sharingandscaleeconomies$5.7BHowever,manycompanieshavecreatedenormousvaluethroughsuccessfulacquisitions.BainM&A27BainM&AAgendaIntroductionTrendsinM&AGuidingPrinciplesforSuccessfulM&ABainApproachCaseExamplesscreeningduediligencesaleExerciseonSynergyCalculationTypicalWatchoutsKeyTakeaways28BainApproachKeyActivitiesStrategyAcquisitiontargetscreenDuediligenceTargetvaluationIntegrationWhatsectororregion?ThebestcandidatebasedonattractivenessandavailabilityTherightpriceGettingfullvalueBidstructureandnegotiationsIntegrationpre-planningBain'sapproachtoacquisitionsfollowsaseriesofkeysteps.Shouldanacquisitionstrategybepursued?ValidatescreeningassumptionsBainM&A29BainApproachM&AValueChainObjective:Identifypotentialcandidateswhichpresentbestfitintermsof:relatednessimpactonmarketpositionUnderstandfullstrategicvalueofacquisitioncandidateImplementstrategicvisionformergerthatgivesdirectionandimpetusforchangeDefinitiveactionsandroledefinitionstospeedintegrationprocessBusiness/strategicreviewmarkettrendscustomersandsupplierscompetitorscosts,technologyvaluation/fullpotentialassessmentBainActivities:IndustryprofileTargetscreeningTargetapproachQuantifycurrentoperatingvalue,standaloneoperatingimprovements,andpotentialsynergiesPre-planningcombinedcashflowsTransitionplanCostreductionRevenueenhancementMakebetterdecisionsupfrontProvideagendaforpost-acquisitionchangeImprovesuccessinclosingdealCommonPitfalls:DrawingupincompletelistofcandidatesUseofscreenprocesstodevelopastrategyNon-identificationof"dealbreaker"issuesMisunderstandingofcostsavingsandupsideopportunitiesIgnoremarketdynamicsandcompetitorimpactonfuturecashflowsTakingmanagementprojectionsatfacevalueReluctancetointerfereinoperationsofacquireeBainhasconsiderableexperienceinthedifferentskillsetsneededatdifferentstagesintheacquisitionprocess.IntegrationValuationDueDiligenceAcquisitionScreeningBainM&A30BainApproachBainandOtherAdvisors'RoleBain'sRole:AnalyzequalityofcustomerandsupplierbaseLookforpotentialcostsavingsandupsidesynergiesUnderstandmarketdynamicstobetterprojectmarketandcompanygrowthobjectivesConstructadiscountedcashflowmodelthatvaluesstandalone,operatingimprovementsandpotentialsynergiesProvidearealitycheckonmarketvaluationsActiveinvolvementintransitionplan,costreductionandrevenueenhancementopportunities"Hands-on"driverofchangeprocesstorealizefullvalueofmergedentityIntandemwithaccountants,analyzefinancialprojectionsbasedonmanagerialinputInvestmentBanks:ValuebasedonpricesofcomparablebusinessesrecentlyboughtorsoldMultipleofearnings/cashflow,assetsLittleornodirectinputinpost-mergeractivitiesLimitedexternalresearchlargelydependentonmanagerialprojectionsAccountingFirms*:DeterminetargetsbasedoncorporateobjectivesandstrategiesIdentifyacquisitionsthatenabletheacquirerto:penetratenewmarketsacquirecapabilitiesgainscaleadvantageimproverelativemarketpositionCombforpotentialacquisitioncandidatesbasedonavailabilityUtilizecontactstobuildawidelistofpotentialtargetsLookforpotentialacquisitioncandidatesbasedonavailabilityUsecontactstobuildlistofpotentialtargetsValuebasedonpricesofcomparablebusinessesrecentlyboughtorsoldConstructabasicDCFmodelLittleornodirectinputinpost-mergeractivitiesBainprovidesaneutral,third-partyviewandanalysisontheprimarystrategicandfinancialissues.Notes:*ConsultingbranchesofBigSixAccountingFirms.
IntegrationValuationDueDiligenceAcquisitionScreeningBainM&A31BainApproachRolesandResponsibilities848704a2d01-190%20%40%60%80%100%PercentofProfessionalTimeScreeningstudyPortfolioNormbandsKeyissuesinvestigationIntrinsiccashflowvaluationHow,whatandwhentosayScriptsNon-offerletterTermsSupportasneededLegalDuediligenceProspectusOtherdocument-ationScriptsDuediligencePresentationtobothboardsMarketvaluationHow,whatandwhentosayPriceTermsSupportasneededPresentationtoboardLetterofcomfortDuediligenceProformasAccountantsBainLawyersInvestmentBanksIdentifycandidateDueDiligenceValuationDevelopmentapproachDevelopofferanddealstructureNegotiateBoardapprovalsImplementBainisanintegralpartofadedicatedteamofM&Aprofessionals.BainM&A32BainApproachAcquisitionScreening848704a2d01-20Objective:Identifypotentialcandidateswhichpresentbestfitintermsof:relatednessimpactonmarketpositionBainActivities:IndustryprofileTargetscreeningTargetapproachCommonPitfalls:DrawingupincompletelistofcandidatesUseofscreenprocesstodevelopastrategyFindingpotentiallyattractivetargetsisthecriticalfirststepinanM&Aprocess.IntegrationValuationDueDiligenceAcquisitionScreeningBainM&A33AcquisitionScreening
(CommonMistakes)BainApproachReviewallpotentialcandidatesanddeterminewhichonespresentthebestfitintermsof:relatednessimpactonmarketpositionObjective:Drawingupanincompletelistofcandidates,excludingdivisionsoflargecompaniesandverysmallcompaniesUsingthescreeningprocesstodevelopthestrategySaying"Wecan'tbuyitbecause...""Theyhaveturnedusdownbefore""Thegovernmentwon'tapproveit"or"It'sfamily/state/competitor/orbigcompanyowned"MakingthewrongcontactatthetargetcompanyBeingimpatientwithacquisitionprocessAssuming"no"reallymeans"no"Commonpitfalls:Inadequatescreeningofcandidatesiscommonplace.BainM&A34CandidateScreeningProcessBainApproachFocusofanalysis:BroadscreenFinescreenThoroughanalysisMarketpositionRelatednessValuecreationScreeningcriteria:IndustrysectorCompanysizeCompanygrowthMarketshareFinancialperformanceKeysuccessfactorsCompetitiveposition(costs/customers)OpportunityforsynergiesStand-alonevalueofsynergies/performanceimprovementpotentialManagement/culturalconsiderationsObjective:RapidlynarrowdownuniverseofcompaniesProvideshortlistofcandidatesDetailedassessmentofremainingcandidatesBain'sapproachtoscreeninginvolvescarefulanalysisofthemarket,competitorsandthetarget.BainM&A35ScreeningCriteriaBainApproachPartialexaminationCompleteexaminationTheBainapproachtoscreeningevaluatesthemarketdynamicsandthetarget'sperformanceandfitwiththeacquirer.SizeGrowthRateIndustryConcentrationKeySuccessFactorsSizeRelativeGrowthRelativeMarketShareCompetitor
CustomerCostStand-aloneFinancialPerformanceKeySuccessFactorsValueofRelatednessScreenMarketAttractivenessBroadFineThoroughMarketPositionOverlapValueCreationBainM&AAvailabilityofBenefits36DueDiligenceBainApproachBusiness/strategicreviewmarkettrendscustomersandsupplierscompetitorscosts,technologyvaluation/fullpotentialassessmentMakebetterdecisionsupfrontProvideagendaforpost-acquisitionchangeImprovesuccessinclosingdealNon-identificationof"dealbreaker"issuesMisunderstandingofcostsavingsandupsideopportunitiesBaingoesbeyondfinancialanalysistoassessfullythecompetitivepositionofthetarget,andidentify"dealbreaker"issues.IntegrationValuationDueDiligenceAcquisitionScreeningObjective:BainActivities:CommonPitfalls:BainM&A37ApproachtoDueDiligenceBainApproachBainminimizestherisksofacquisitionswithathoroughapproachtoduediligence.ProvideaccesstotheBainworldnetworktosupportpre-letterofintentgo/no-godecisionsConductexhaustiveduediligencestudyofindustryandcompanydynamics:identifykeycashflowdriversquantifymarginandrevenuegrowthforecastsquantifycostreductionpotentialidentify"dealbreakers"and/or"redflags"causingbidadjustmentsidentifyandquantifyallupsideopportunitiesIdentifyandevaluatepotentialexitoptionsAssistinsecuringfinancingthroughdevelopmentandpresentationofobjective,third-partybusinessanalysisCreateblueprintforFullPotentialstrategyGenerateenthusiasmandmomentumforthedealwithinthetargetcompanyBainM&A38TypicalDueDiligenceIssues(1of2)BainApproachWhatbusinessisthetargetin?Whoarethecurrentandpotentialcompetitors?BusinessDefinition:Isthisanattractiveindustryfromsize,growth,supplierpower,regulatoryenvironment,businessconcentrationandprofitabilityperspectives?Isthistherighttimetobuy?MarketOverview:Howdoyoumakemoneyinthisbusinesstodayandinthefuture?KeySuccessFactors:Howwellpositionedisthetargetcompany?(marketshare,management,products,companyperformance,customerstability/defections,etc...)CompanyOverview:Whatarekeypurchasecriteriaandhowdoesourtargetperformrelativetocompetitors?Howmightthischangeinthefuture?CustomerEvaluations:Awell-designedduediligenceprocessinvolvesansweringaseriesofkeyquestions.BainM&A39TypicalDueDiligenceIssues(2of2)BainApproachWhatstrategiesarekeycompetitorspursuing?Howsuccessfularethey?CompetitorReview:Howwellmanagedisthebusiness?Wherecanthecompanyimprovemarginsandreturns?Operations:Whatisthepotentialgrowth?Aretherefollow-onacquisitionsavailable?Growth:Whenapplicable,isthereaclearexitstrategy?ExitStrategy:Howmuchisthecompanyworthonastand-alonebasis?Howmuchvaluecanbecreated?Valuation:BainM&A40TypicalDueDiligenceActivitiesBainApproachInterviewswithtargetcompany'smanagementin:marketing/salesfinance/accountingoperationsetc.Comprehensivereviewoftargetcompany'scustomerbase,personnelandoperationsAnalysisofaboveinformationtodetermine:marketshareprojectionspotentialmarginchangesrelativecostpositionsalesforceeffectivenesspotentialoperationalimprovementsBlindinterviewswithcustomers,competitors,suppliersandmarketexpertsconductedbyexperienced,business-mindedgroupmembersExhaustivereviewofmarketresearchreports,companyprofileinformation,articles,publicationsandotherpubliclyavailablesourcesAnalysisofaboveinformationtodetermine:overallmarketgrowthpotentialcustomersegmentationpetitorsbasedoncustomerneedsvulnerabilityinvaluechain(includingdistributionchannels)ExternalAssessmentInternalAssessmentUnderstandingofmarketdynamics,strategicfit,andcompanyperformancerequiresanin-depthexternalandinternalreview.BainM&A41ValuationBainApproachObjective:UnderstandfullstrategicvalueofacquisitioncandidateBainActivities:Quantifycurrentoperatingvalue,standaloneoperatingimprovements,andpotentialsynergiesCommonPitfalls:IgnoremarketdynamicsandcompetitorimpactonfuturecashflowsTakingmanagementprojectionsatfacevalueBain'svaluationprocessquantifiesthefullstrategicvalueofanacquisitiontoensurethattheclientcanpricewithcomfortandconfidence.IntegrationValuationDueDiligenceAcquisitionScreeningBainM&A42TheValueCreationProcessBainApproachDifferencebetweenpurchasepriceandpost-integrationvaluetoclientrepresentsvaluecreationopportunityBain'sapproachtovaluationencompassesthreedistinctstepsthatcloselyexaminethehistoricalandfuturefinancialperformanceofthetarget.Standalonecashflowdomesticdemandimportpenetrationcurrentmarketsharepriceperunitvariablecostperunitfixedcosts(R&D,advertising,etc.)capitalexpendituresIntegrationopportunitiesexpandeddistributionplantconsolidationeliminateredundantR&DpurchasingleverageBettermanagementofassetsplantbestdemonstratedpracticesreducedmanufacturingcomplexityoutsourcing/moveoffshorereducedworkingcapitalMarketvalueofdebtandequityPremiumCurrentmarketvalueMaximumpotentialvalueSynergiesStandaloneoperatingimprovementCurrentoperatingvaluePercentofCurrentMarketValue(DebtandEquity)FinancialdealstructureInvestmentbankingfocusleverage/gearingtypeoffinancialproductsusedBainM&A43ValuationRoadmapBainApproachThevaluationprocessmustanswerasetofkeyquestionsregardingcapabilities,synergies,andstrategicfit.DevelopmentofconservativecaserequirementsprovidesbasisforanalyzingdebtcapacityFiveyearcashflowforecastCriticalareasofsensitivitymarketgrowthactivitykeycustomers/productscostreductioncapitalexpendituresDetailedfinancialduediligencehistoricalfinancialanalysisfutureprotectionsDCFanalysisComparableanalysisOtherpotentialbuyersstrategicfinancialOtheroptionsspin-offliquidationetc.ValuePotentialSynergiesOverallfitwithstrategyCostreductionpotentialfixedvariableRevenuesynergiespositivenegativeCustomerandcompetitionresponseNon-recurringcostsDevelopRequired
CapitalStructureCombinedcashflowforecastsacquirertargetsynergiesPossiblefinancingsourcesequitysecureddebtcashflowloanssellerfinancingHowmuchisthetargetworthtotheseller?Howmuchisthetargetworthtous?Canweaffordit?Doestheincreaseriskmakesense?ValueTargetasStandAloneBusinessDevelopCoreBusinessExpectationsBainRole:BainRole:BainRole:Bain/InvestmentBankRole:CashflowBDPIndustryanalysis3CsRCPInvestmentappraisalCashflowRelatedBVUModules:InvestmentBankRole:BainM&A44AssessedduringduediligenceAkeycomponentinthevaluationprocessistoquantify,asbestaspossible,anyupsideopportunitiesonboththerevenueandcostside.Bottom-L
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