What consulting firms do during Merger and Acquisition projects?

Consulting firms are hired very often to help with Mergers & Acquisitions. Those projects are difficult as you have to deliver results fast and you have to deal with many stakeholders. You not only have to help select potential targets, model businesses in Excel but also you will have to estimate the potential benefits of M&A, the value of the firm, and forecast the development of the acquired firms.

What you will see here is a part of my online course: M&A for Management Consultants & Business Analysts.

Who does M&A projects?

M&A projects are done by both strategic investors as well as Private Equity Funds (PE funds).  Both of them have different reasons and different ways to make money on M&A. Therefore, what you do during M&A as a consulting firm will greatly depend on whether you do it for a strategic investor or PE funds. Before we discuss different types of projects we will try to summarize their approach to mergers & acquisitions.

Strategic investors usually do M&A for 3 main reasons:

  1. They want to expand. M&A is an alternative to building something organically. This option is used is often used if you want to enter a new country. For example, to speed up market entrance Amazon has bought existing firms in UK, Germany, China, and Arab countries. M&A is usually faster than organic growth and in some cases may be cheaper (you don’t waste money on fighting the existing players)
  2. They want to transform their business model. Strategic investors also keep on buying firms to change their business models. DollarShaveClub (razors in a subscription direct-to-consumer) was bought by Unilever that wanted to enter this fast-growing segment despite being mainly concentrated on traditional products sold via retail chains. Amazon has done quite a lot of acquisitions as well for the very same reasons. They have bought robots used in logistics (Kiva – currently Amazon Robotics) to transform their logistics, cut costs and slow down the competitors by denying them access to this technology. In 2020 they have also bought Zoox – self-driving cars that can be used for getting into Uber business or building a fleet of autonomous delivery trucks
  3. They want to kill existing or potential competitors. In many cases, the M&A is a defense strategy. Facebook specializes in this sort of M&A. They have bought Instagram, WhatsApp, Oculus, etc. Amazon has also a lot of achievements in that area. At the beginning of the 21st century, they were buying plenty of potential competitors in e-commerce (e.g. Zappos, diapers.com). They have also bought and killed a potential competitor to Kindle (Stanza) as well as bought and further developed Audible (an audiobooks provider that could have also started selling e-books).

Below the main benefits of the M&A for strategic investors

PE has a totally different perspective to M&A. In short, they want to buy cheap and sell expensive the same firm after 3-5 years. Below a short movie showing how do they achieve that goal:

What consulting firms do during M&A projects

Consulting firms can work at any of the 5 main stages of the M&A process. Below we show a short summary of what you can do during this sort of projects

As you can see consulting firms were pretty creative and have managed to build a strong portfolio of different products for M&A. Most money is spent during the first 3 stages. Almost every buyer will spend some money on due diligence. Consulting fees look very small in comparison with the transaction value, so it is much easier to convince the customer to spend some money on consulting. However, more and more PE funds also put a lot of money on the Value Creation stage. Remember about their time horizon. They have to return the money they have borrowed from investors to buy the firm, in 3-5 years. So, if the speed of growth, transformation is not satisfactory they really open their wallets.

Below have a look at examples of analyses done during M&A projects:

  1. Estimating potential benefits of M&A
  2. Selecting potential targets for M&A
  3. Financial model of e-commerce business
  4. Financial model of Retail business
  5. Analysis of potential investment that may have an impact on EBITDA generated by the firm
  6. Find optimal financing for the M&A
  7. Analyze potential white spaces for expansion

Due Diligence

As we have said the phase during which customers tend to do spend a lot on consulting is due diligence. During this project, you try to discover whether it makes sense to buy the firm or not and what should be the price.

Let’s start with a more detailed definition of due diligence:

During the due diligence, you try to answer 6 main questions.

Most due diligence projects will consist of 3 main parts: Legal, Financial & Commercial Due Diligence. As a management consultant, you will do the Commercial Due Diligence, during which you will try to understand the business model of the firm, main challenges, business drivers, competition landscape. This will help you create a business model of the firm in Excel and estimate its value. In most cases, the result of the commercial due diligence will impact the decision and also the price the acquiring firm is willing to pay. In most cases, the due diligence project will take from 1-6 months.

The process of delivering commercial due diligence consists of 6 main steps:

  1. Create the financial model template. As we have mentioned at the end you want to have a valuation of the business that they are considering buying. That’s why you usually start by building a financial model template.
  2. Create the template for the final presentation. In the second step, you create the template for the end presentation. The aim of the presentation is to show the overall market, competition landscape, main trends, and the performance of the firm they consider buying. Once you have clarity on the deliverables you can define what data you need
  3. Send data requests. The main obstacle in preparing commercial due diligence is the lack of data. Therefore, you have to, as soon as possible send a data request to the firm that they consider buying.
  4. Independent Data Gathering. On top of that, you will have to own your own gather a lot of data not to be misled by the target firm that they consider buying. This where you generate the biggest value. Check my post on market and consumer research to see what methods you have at your disposal. Remember also to gather official (financial) data that are quite revealing and to look for KPIs/benchmarks. You will spend a lot of time analyzing competitors using different tools.
  5. Filling in templates. Once you have data both from the potential target and your own sources you can finally start creating the end products (the final presentation and the financial model)
  6. Discussion. The most interesting part is the discussion stage. Here you show the results to the potential buyers and you discuss with him results. The potential buyer will quite often be surprised by the results of the commercial due diligence. He may discover that the firm is not what he thought, that the market is not growing as fast as he thought or that there are a lot of potential competitors. At this stage, you prove to the customers that you were worth the money he has spent on the project

That’s in short for more detailed examples of analyses in Excel check my online course: M&A for Management Consultants & Business Analysts.

Check also our general presentation on M&A

As well as the presentation showing M&A done by Amazon & Disney

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