Financial analyst

Assess High Potential Candidates in Depth

Once you have narrowed your list of candidates to a handful of realistic possibilities, you will begin the detailed work of valuing each candidate and identifying your strategy for creating value. You will need a plan that more than earns back the purchase price, including a premium that you would have to pay to complete a deal. With takeover premiums running 30 percent to 40 percent and more above the pre-acquisition market values, you will want to be sure the synergies are both large and clearly identified.
When undertaking a detailed evaluation of the remaining candidates, keep in mind the distinction between the value to you and the price you will need to pay. Your obvious objective should be to maximize the former while minimizing the latter. The essential starting point is a clear understanding of the value of the company to you under your ownership. This consists of its standalone value, as operated by current management; likely net synergies from the combination, after taking into account potential lost business from disruption, and transactions costs, such as restructuring charges and deal fees. The more specific you can be in assessing each of these areas, the better prepared you will be for negotiations and subsequent integration.
Standalone value should be looked at from multiple perspectives, including average securities analyst estimates, past performance, and management pronouncements. Likewise, synergies should be categorized and quantified wherever possible. You should also assess how long it will take to capture the synergies. And don’t forget about the impact of competitor reactions to your deal that could have a financial impact on the combined firm.