What is M&A Analysis?
Many businesses are constantly looking for ways to improve efficiency, increase sales, and take advantage of new opportunities, such as emerging markets. M&A analysis is a specialized type of financial analysis that helps firms make decisions related to acquisitions of other companies or assets. The most important part of an M&A analysis according to Fintalent’s M&A Analysis consultants is determining the value, or acquisition price, but many other factors must also be taken into account in order to ensure that the decision is sound and feasible.
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An M&A analysis is done in order to provide information about the financial implications of a merger, acquisition, or business combination. This involves estimating a future cash flow for the business and comparing it to the cost of acquiring another company. The cash flow incorporates forecasting assumptions, such as economic growth rates and industry trends. A range of possible scenarios can be calculated in order to account for various outcomes.
The acquirer finds that it can acquire another business for less than if it were to build the target company’s assets from scratch. This value is called the synergy effect and is typically expressed as an increased operating income (earnings before interest and taxes).
The target company gives the acquirer access to business opportunities, such as a new market. The potential value of these opportunities is called the option effect.
This acquisition has positive effects from the knowledge spillover theory, which is when knowledge that is gained from acquired firms leads to increased production efficiency at the acquiring firm.
There are many factors that must be considered before a merger or acquisition will be successful and profitable for both parties involved. Some of these considerations include:
A fundamental part of any merger or acquisition is due diligence and ensuring that both parties are entering into this transaction with full knowledge of all relevant facts. This is most often done by a third-party, but the acquirer is ultimately responsible for this due diligence. The following steps are typically performed in order to ensure that the transaction is handled correctly:
A merger or acquisition involves a lot of planning, including researching and negotiating with both sides until a successful deal is reached. This planning can be estimated by using an internal financial model called an M&A model. This diagram represents how the various stages of the M&A process work together, starting with explicit strategic goals and ending with determining actual numbers and scenarios to use in financial forecasts;
M&A models are used throughout the organization. They become integral parts of advisory board meetings and are used to predict the effects of mergers and acquisitions as well as decide if a merger or acquisition will be profitable. Some examples of how a M&A model is used by an organization include:
An M&A model provides different scenarios of mutually beneficial deals, which the financial department can then use to determine if it is viable for the company.
For example, a company may want to engage in an acquisition that results in greater profitability, and this can be done through a SWOT analysis. This type of analysis involves evaluating each side’s strengths, weaknesses, opportunities, and threats.
Finance departments use M&A models to determine the rate of return on each deal and revenue raised. This can also be used for other financial planning purposes, such as hedging, growth capital planning, and strategic business planning.
Many M&A model uses are based on a discounted cash flow model that takes into account the expected profitability of each option or scenario. It involves using an estimated rate of return on investment (ROI) and discount rates in order to determine the best-case scenario for a company.
Anti-trust laws limit monopolistic behavior. Merging two companies that would make one larger would create an anti-competitive monopoly, therefore anti-trust laws have been instituted to prevent this from occurring.
