Speed Of Integration In M&A

Speed Of Integration In M&A

In an #mergersandacquisitions deal, rapid integration is essential to realize the projected financial returns envisioned in the deal model. Let me substantiate with an example.

The buyer has valued the target at $100 million by valuing its future cash flows discounted at its #WACC. Assuming the buyer is willing to pay a $25 million premium for the target over its current share price, believing it can recover the premium by realizing cost savings from integrating the two firms. The amount of cash the acquirer will have to generate to recover the premium will increase the longer it takes to integrate the target company. For example, if WACC is 10% and integration gets completed by the end of the first year, the acquirer will have to earn $27.5 million by the end of the first year to recover the premium plus its WACCC [$25 + ($25 * 0.10)]. If integration does not finish until the end of the second year, the acquirer will have to earn an incremental cash flow of $30.25 million [$27.5 + ($27.5 * 0.10)], and so on.

Unless the target’s #operatingmodel differs from the acquirer (deals where adjacencies are far from the core), delaying integration would hamper the deal’s #payback period.