M&As – getting the recipe right

Financial modelling that is geared towards strategising for mergers and acquisitions should be considered as essential for any firm looking to develop its business in new markets and jurisdictions. It should also be considered as a vital tool when looking for that extra edge necessary to outperform the competition or to prepare for future eventualities through the addition of valuable skills and technologies.

However, it is worth remembering that a merger and acquisition will not always be suited to the needs of your business, and there are always a number of factors that you will need to consider in depth before you embark on any merger or acquisition process.

M&A financial modelling

Before beginning a mergers or acquisition process, sound financial modelling can help you consider both the strategic and financial implications.

Of course, these things are not mutually exclusive, but if an M&A seems entirely short-term and purely financial in its benefits, you should seek as much advice as possible to help you consider whether it is in your long-term strategic interests to proceed.

As such, the following questions are always a good starting point for any party facing a decision related to a possible merger or acquisition. Will the consolidation:

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  • enhance your firm’s credibility?
  • afford you the reality or at least possibility of new markets?
  • enhance your firm’s expertise?
  • enhance your firm’s infrastructure?
  • add meaningfully to your firm’s array of products and/or services?
  • enrich your firm’s intellectual property?
  • impact the wider market in a way that protects or advances your interests?
  • enrich your firm’s human resources?
  • add value for both you and the other party involved?

Making sense of strategy

One thing that financial modelling courses frequently aim to teach is the more complex strategising behind some M&As.

For example, it is not entirely unusual for firms acquired as part of M&As to be valued for sums that seem inexplicably high.

There may be a simple old-fashioned free-market economic explanation at play: the firm is worth what the acquirer is willing to pay for it.

There is a way to illustrate this: imagine a highly specialised “boutique” fintech firm that has only a few contacts and a few products. And imagine that in 2015 it is valued at just a six-figure sum but five months later is sold to a much larger and more established competitor for a seven or even eight-figure sum.

Although it is possible that the larger firm got a raw deal and was in receipt of dodgy due diligence, let’s discount the idea for a moment and imagine that the smaller firm possessed something of great value to the larger firm: specific contacts and specific products that had the potential to revolutionise the larger firm’s offering and to greatly enhance its profitability. It may also be that against the background of an evolving sector the larger firm felt that it had little option but to take decisive action in the here and now to be able to respond to the predicted future direction of the market.

In this case, the short-term expenditure of paying over the odds is vastly outweighed by the long-term value of acquiring added value in the form of specific contacts and products. Although the end-goal is, of course, financial, the kind of long-view thinking involved means that the two fintech firms have very much engaged in a strategic deal.

Successful strategic mergers

Other situations in which financial modelling might point a firm towards the benefits of a strategic merger include the following:

  • It wishes to embrace a particular ethos or brand that is embodied by another firm
  • It wishes to add to its intellectual property
  • It wishes to address gaps or underdeveloped parts of its services, products, contacts or client lists
  • It wishes to acquire talent, sometimes wholesale
  • It wishes to cut costs or introduce new revenue streams
  • It wishes to speed its development outside of the existing growth strategy

When to be wary

Financial modelling courses can help you account for some, although not all, of the potential challenges you might face in a merger or acquisition.

In fact, there are many situations where mergers don’t work out; CNBC.com recently reported that the overall failure rate for mergers is around five percent. For example, only a few months ago Staples and Office Depot abandoned their M&A plans after failing to meet a number of antitrust criteria. Fortunately for the two parties involved, the M&A did not proceed to the point of ruin. Other companies have not been so lucky. Notable examples of failed mergers include the following:

  • Daimler-Benz And Chrysler
  • Quaker And Snapple
  • Sprint And Nextel
  • AOL and Time Warner
  • eBay and Skype

To avoid falling into the trap of an unsuccessful M&A it is important to look in-depth at the culture and people of the two firm’s concerned and to ensure that there are no irreconcilable clashes.

In addition to cultural problems, the above-listed M&As failed because they created brand and marketplace confusion, distracted people and resources from their chief concerns and served only to dilute what were previously clear goals and identities.

Make sure you and your firm avoid these pitfalls: undertake effective financial modelling for mergers and acquisitions training so that you fully understand all of the risks, the advantages and the processes involved.