Need to develop an M&A business case? Here’s how

M&A is an exciting space. FACT!

A space where strategic thinking can really make the difference between an expensive failure or a prize winning acquisition. Developing an M&A business case requires skill and takes considerable time and effort. Getting it right can help a business make better decisions and avoid costly mistakes.

So how do you go about it?

Let’s imagine you’re looking to buy a business in South America. The board has indicated they’re looking at a new business line or revenue opportunity. They’ve even spotted an acquisition target they’d like to pursue. It’s your job to return to the board in a few weeks with a recommendation on how best to proceed. It might be that you end up recommending a buy out, partnership or even, after thorough due diligence, that the target and opportunity is best left alone.

Over the years I’ve worked with many companies in developing a framework to better judge opportunities. Here’s my take on that framework.

Firstly there are two ways to look at any opportunity or target.

1. Strategic Fit Criteria

This is where you look at how well the opportunity or target fits into the wider strategic needs and direction of the acquiring company (in other words your business). It’s about judging whether you’re buying something you need vs. buying something that is an unnecessary distraction.

2. Target Evaluation Criteria

This is where you look at the target or business itself. Here you’re judging how the potential target has been performing. You’ll be looking out for signs of stress or growth. You’ll also be looking at how the target is functioning and whether the owners or shareholders are up for any type of deal.

So let’s start with the Strategic Fit and let’s imagine you’re buying a gaming company in Brazil.

Strategic Fit is made up of a multitude of criteria that you need to assess and investigate against.

1. Strategic ambition & goal alignment — how critical is the opportunity towards helping the acquiring business achieve its purpose, vision and goals. You can give this a simple score but remember to provide a narrative for your business case yay or nay.
2. Market health indicators — if you’re investing into a new country you might want to assess how healthy the country is from an economic perspective. You’ll want to look at market opportunity size, unemployment rates and growth rates (historic, actual & forecast).
3. Market stability — this will include ease of doing business, political stability, rule of law and acceptability of foreign investment. The scores and narrative judgement you give here will impact heavily on any decision. In a recent project we noted the UK as moving from green to amber due to Brexit. In markets such as Russia, rule of law and acceptability of foreign investment should make any business think very carefully. For independent benchmarks consider looking at the Global Opportunity Index.
4. Direction of regulatory travel — again regulation changes depending on the government in power. It’s an important area to assess if you’re entering a market where regulation comes and goes rapidly or if you’re investing in a business where regulation is heavy i.e oil and gas or gambling. You can give grades here such as low touch through to high/cumbersome.
5. Competition — here it’s about looking at whether the market is green field or crowded. If buying a business where the market is weak or crowded with competitors you might want to re-consider any offer to the target.
6. Cost to launch / run — this is difficult unless you have benchmarks in place but you should be able to determine how costly the business would be to buy and grow in the market you’re investing in. You’ll need to think of everything from the price of implementing regulations to the headcount of workers.
7. Additional considerations — you can add anything into the framework here. If you’re buying that gaming business you might want to assess how well suited the market is to sustain success. There’s no point buying a gaming business and sustaining it through investment in a market where digital is non-existent.

Now comes the Target criteria.

This is where you’re looking at the business itself and trying to assess whether it is worth pursing or not. There’s a lot of criteria you should consider here but below are my top tips.

1. Experience & proposition — is the business well regarded by customers? Does it have a strong and loyal customer base?
2. Financial strength & performance — here you’re looking at things like debt management, cost structures, cash flow and how well the business has secured and managed investments in the past. It’s also critical to assess whether they have recorded profits or expect to in future. A new business should still have projections in place.
3. Operational strength & performance — here is where the personnel side comes in. You need to assess whether the management team is strong or whether it needs to be replaced. You’ll want to look at employee churn and what gaps they have in terms of skills and capabilities.
4. Deal willingness — always a tricky one, but this is about feeling for how warm owners or shareholders are to any deal. It might be a flat no or a willingness to negotiate the type of acquisition or price. Remember to look out for board alignment here and whether there are any activist investors involved in the business. You don’t want to buy a troublesome board that sucks up your energy trying to reform it.

M&A is an exciting space where research and due diligence come into their own. At Strategy Activist we work with clients to ensure they buy businesses that further their strategic objectives. If you need help with any M&A work visit www.strategyactivist.com to learn more.