Buzz Words Used In M&A

Buzz Words Used In M&A

In my experience of evaluating mergers and acquisitions transactions, i have observed a 𝐟𝐞𝐰 𝐛𝐮𝐳𝐳 𝐰𝐨𝐫𝐝𝐬 𝐭𝐡𝐚𝐭 𝐜𝐫𝐨𝐩 𝐮𝐩 𝐢𝐧 𝐞𝐯𝐞𝐫𝐲 𝐈𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧 𝐦𝐞𝐦𝐨𝐫𝐚𝐧𝐝𝐮𝐦 𝐨𝐟 𝐚 𝐭𝐚𝐫𝐠𝐞𝐭 𝐜𝐨𝐦𝐩𝐚𝐧𝐲. These buzz words are:

𝟏)𝐁𝐫𝐚𝐧𝐝 𝐍𝐚𝐦𝐞

𝟐)𝐄𝐜𝐨𝐧𝐨𝐦𝐢𝐞𝐬 𝐨𝐟 𝐬𝐜𝐚𝐥𝐞

𝟑)𝐒𝐮𝐩𝐞𝐫𝐢𝐨𝐫 𝐮𝐧𝐢𝐭 𝐞𝐜𝐨𝐧𝐨𝐦𝐢𝐜𝐬

𝟑)𝐂𝐨𝐦𝐩𝐞𝐭𝐢𝐭𝐢𝐯𝐞 𝐚𝐝𝐯𝐚𝐧𝐭𝐚𝐠𝐞

𝟓)𝐂𝐚𝐧𝐧𝐲 𝐛𝐨𝐫𝐫𝐨𝐰𝐞𝐫

𝟔)𝐓𝐚𝐱 𝐚𝐝𝐯𝐚𝐧𝐭𝐚𝐠𝐞

Target companies use the above buzz words to justify lofty valuations. However, 𝐰𝐡𝐞𝐧 𝐢 𝐯𝐚𝐥𝐮𝐞 𝐭𝐡𝐞 𝐜𝐨𝐦𝐩𝐚𝐧𝐲, 𝐢 𝐜𝐨𝐧𝐯𝐞𝐫𝐭 𝐭𝐡𝐞𝐬𝐞 𝐛𝐮𝐳𝐳 𝐰𝐨𝐫𝐝𝐬 𝐭𝐨 𝐧𝐮𝐦𝐛𝐞𝐫𝐬 and check whether 𝐭𝐡𝐞𝐬𝐞 𝐛𝐮𝐳𝐳 𝐰𝐨𝐫𝐝𝐬 justify the target company’s valuation.

I have maintained that there are only three ways to improve value:

𝐚)𝐈𝐦𝐩𝐫𝐨𝐯𝐞 𝐭𝐡𝐞 𝐫𝐞𝐯𝐞𝐧𝐮𝐞 𝐠𝐫𝐨𝐰𝐭𝐡 𝐭𝐫𝐚𝐣𝐞𝐜𝐭𝐨𝐫𝐲

𝐛)𝐈𝐦𝐩𝐫𝐨𝐯𝐞 𝐭𝐡𝐞 𝐩𝐫𝐨𝐟𝐢𝐭𝐚𝐛𝐢𝐥𝐢𝐭𝐲 𝐨𝐟 𝐭𝐡𝐞 𝐮𝐧𝐝𝐞𝐫𝐥𝐲𝐢𝐧𝐠 𝐛𝐮𝐬𝐢𝐧𝐞𝐬𝐬 𝐦𝐨𝐝𝐞𝐥

𝐜)𝐑𝐞𝐝𝐮𝐜𝐞 𝐭𝐡𝐞 𝐮𝐧𝐝𝐞𝐫𝐥𝐲𝐢𝐧𝐠 𝐫𝐢𝐬𝐤 𝐨𝐟 𝐭𝐡𝐞 𝐛𝐮𝐬𝐢𝐧𝐞𝐬𝐬

Thus, whenever i come across the above buzz words, i link the buzz words in my valuation model to cash flows and check whether these buzz words improve the target valuation.

In my experience, bankers use these 𝐛𝐮𝐳𝐳𝐰𝐨𝐫𝐝𝐬 𝐚𝐫𝐞 𝐮𝐬𝐮𝐚𝐥𝐥𝐲 𝐦𝐚𝐫𝐤𝐞𝐭𝐢𝐧𝐠 𝐠𝐢𝐦𝐦𝐢𝐜𝐤𝐬 used do not link value creation or justify lofty valuations that a target company demands.