Mergers and acquisitions (M&A) framework that you can use in the case interview

You can understand the M&A framework as a cost-benefit analysis.  The “1-time costs” and “Risks” buckets cover the costs; the “Synergies” bucket covers the benefits. 

In addition, one advanced concept that you need to understand in order to grasp the M&A framework is that of the “Acquisition premium”, which is the first sub-bucket under “1-time costs.”  When one company acquires another, the acquisition price that the two parties agree upon is almost always at a premium over the target company’s market valuation.  Otherwise, the target company’s shareholders wouldn’t agree to being bought out.  The acquisition therefore only becomes worthwhile to the acquirer if it can gain back that premium through the synergies that will come out of the acquisition.   

There are integration costs as well that the acquiring company will incur such as the work to integrate the IT systems, offices, health insurance plans and so on for the two companies.  And the acquiring company needs to gain back the cash lost to these integration costs through the synergies achieved as well.  Otherwise, the acquisition deal will not be worthwhile.

Regarding the “Opportunity Cost” sub-bucket under “Risks”: the acquisition isn’t the best strategy for the client if there are better companies on the market for them to acquire; if they can achieve the same capabilities and synergies at lower cost and less risk through a joint-venture; or if they can develop these same capabilities and synergies organically from scratch with their own internal capabilities within their desired time frame and at lower cost.