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Making Sure the Price Is Right

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.

  • Get a 360-degree view. How much value is really at stake? Answering the question with confidence requires considering every aspect of the transaction and doing a systematic tear-down of the target’s business.
  • Quantify the cost of inaction. How will the business be impacted if a competitor acquires the target? Knowing the answer can help minimize future damage and reveal the true value of the deal.
  • Do original customer research. Don’t base your projections of future earnings on historical or average performance. Get in the trenches and talk with customers about the target’s current performance.
  • Uncover the upside. Interviewing customers can also help identify opportunities to rationalize plants and facilities and estimate the innovation potential of the combined business.
  • Put PMI before the sale. Postmerger integration planning before the deal can build realism into the valuation and provide a road map for the all-important PMI process.
  • Take a structured approach to bidding. The most painstaking evaluation is meaningless if the upside is squandered in the bidding. Take a structured approach with predetermined opening and walk-away price points to ensure that identified value is actually delivered to shareholders.
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