Many M&A deals fail to provide value to the buyer. Why? One common reason is that the acquirer overpays. BCG helps companies take a far more rigorous approach to valuation than is available in most standard approaches.
One of the reasons so many acquisitions destroy value is the willingness of senior executives to overpay for targets in pursuit of synergies that either don’t exist or cannot be achieved. “Deal fever” can infect even the most experienced executives, causing them to overestimate the potential upside of a deal in order to justify the price. They also tend to underestimate the disruption to their core business from the cost and effort of closing the deal and carrying out the postmerger integration (PMI).
Traditional valuation models typically analyze comparable transactions and industry multiples; build a discounted cash-flow model based on the stand-alone value and likely earnings trajectory of the target; and then add rule-of-thumb overlays to project cost and revenue synergies. BCG advocates a far more rigorous approach to valuation. Here are a few things companies can do to make sure they’re paying a fair price.