[ Pobierz całość w formacie PDF ]
.In practice, no one technique is used 100 percent of the time.Rather, multiple sources of information are compared, along with a “gut feel” for where the bid needs to be to win the auction.3.Target financial projections are used as a basis for these models.The team can start with the preliminary model94CHAPTER 6run before due diligence and expand it based on theinformation learned.4.Synergies are net benefits that are planned in the acquisition.Revenue synergies reflect areas in which rev-enues can be enhanced by sharing customer lists,combining sales forces, and so on.Cost synergies represent savings in the combined entity by removing dupli-cate personnel, consolidating office locations, and so on.In general, cost synergies are easier to forecast andimplement than revenue synergies.5.The financial representative needs to work very closely with the due diligence team to ensure that exposureareas are factored into the purchase model.6.The discounted cash flow (DCF) approach uses the net present value of the target’s expected cash flows to estimate a purchase price.Although this is a pure form of analysis based on the true economics, it can be difficult to forecast the expected cash flows accurately.7.The capital asset pricing model (CAPM) can be used in the DCF approach to determine the appropriate discount rate to apply to the cash flows.An internal rate of return can be used to rank projects and determinewhich ones deserve an allocation of capital.8.Market-based methods use comparable companies to value the target.They are relatively simple to understand.However, the difficulty of finding proper comparables and room for management judgment can producea misleading view of value.9.The GAAP income approach uses the target’s financial statement net income and projections to derive a value.This is generally in line with how most targets budget their own business.However, the inherent limitations in GAAP reporting (historical value, lower of cost or market, and so on) can distort the true value of the firm.C H A P T E R 7Pulling It All TogetherThe final purchase price is normally determined using some combination of the several valuation methods that we described in Chapter 6, along with consideration of where the bid “needs to be”in order to be competitive.None of the financial modeling approaches can be taken at face value because of the large number of assumptions and the degree of human judgment inherent in these calculations.The business development leader’s job is to sort through all of this data and present a reasonable case to the buyer’s senior management and/or board of directors for approval.Effective business development professionals need to be in constant contact with the various function heads throughout the due diligence process.This allows the leader to stay on top of critical issues and deal with them on a real-time basis so as not to be surprised by “deal-breaking” issues at the end.Interim deadlines for preliminary feedback on major findings should be established for the deal team members.This normally happens throughout the due diligence process in informal meetings and discussions.Each member of the due diligence team will write a report on the findings and critical issues from his or her area.These reports are circulated to all team members and the buyer’s senior management to give a broad perspective on the issues.The interplay of ideas among the different functions often provides a valuable perspective on issues and a plan for handling them.For example, an issue regarding an exorbitant bonus plan that was brought to the surface by the HR team affects not only HR, but also finance (i.e., 95Copyright © 2007 by The McGraw-Hill Companies, Inc.Click here for terms of use.96CHAPTER 7the cost to maintain the plan), legal (to analyze the terms and conditions of the plan), and integration (to determine how this plan can mesh with the buyer’s existing policies).POST-DUE DILIGENCE COORDINATION:SUMMARIZING RESULTSThe diligence reports prepared by each of the functional areas provide the basis for the deal approval presentation to senior management.However, there is far too much detail in these reports for the senior management team to digest.Business development professionals play a valuable role here, attempting to distill the relevant issues from the large amount of data amassed during due diligence while being careful to highlight all of those issues.A balanced presentation needs to be made so that the board of directors can make an informed decision.This takes discipline on the part of the deal team.By this point, a huge amount of time and effort has gone into the deal.The business development leader normally has a vested interest (i.e., incentive compensation, prestige, career development, and so on) in getting the deal to happen.However, this must not cloud his or her judgment on the deal or how it is presented to the board of directors.All points of view must be considered for a balanced presentation.As recent history has shown, the consequences of pushing a bad deal too aggressively are much more severe than the upside to be gained from doing the deal.SENIOR MANAGEMENT APPROVALThe senior management approval process can be extremely difficult or very easy, depending on (1) your company’s attitude toward acquisitions and (2) senior management’s level of involvement in the process up until this point.Some firms have more of a “growth mindset”that makes them more willing to pursue acquisitions as a way to fuel business growth.They are used to looking at large, distinct projects and the risks and rewards associated with them [ Pobierz całość w formacie PDF ]
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.In practice, no one technique is used 100 percent of the time.Rather, multiple sources of information are compared, along with a “gut feel” for where the bid needs to be to win the auction.3.Target financial projections are used as a basis for these models.The team can start with the preliminary model94CHAPTER 6run before due diligence and expand it based on theinformation learned.4.Synergies are net benefits that are planned in the acquisition.Revenue synergies reflect areas in which rev-enues can be enhanced by sharing customer lists,combining sales forces, and so on.Cost synergies represent savings in the combined entity by removing dupli-cate personnel, consolidating office locations, and so on.In general, cost synergies are easier to forecast andimplement than revenue synergies.5.The financial representative needs to work very closely with the due diligence team to ensure that exposureareas are factored into the purchase model.6.The discounted cash flow (DCF) approach uses the net present value of the target’s expected cash flows to estimate a purchase price.Although this is a pure form of analysis based on the true economics, it can be difficult to forecast the expected cash flows accurately.7.The capital asset pricing model (CAPM) can be used in the DCF approach to determine the appropriate discount rate to apply to the cash flows.An internal rate of return can be used to rank projects and determinewhich ones deserve an allocation of capital.8.Market-based methods use comparable companies to value the target.They are relatively simple to understand.However, the difficulty of finding proper comparables and room for management judgment can producea misleading view of value.9.The GAAP income approach uses the target’s financial statement net income and projections to derive a value.This is generally in line with how most targets budget their own business.However, the inherent limitations in GAAP reporting (historical value, lower of cost or market, and so on) can distort the true value of the firm.C H A P T E R 7Pulling It All TogetherThe final purchase price is normally determined using some combination of the several valuation methods that we described in Chapter 6, along with consideration of where the bid “needs to be”in order to be competitive.None of the financial modeling approaches can be taken at face value because of the large number of assumptions and the degree of human judgment inherent in these calculations.The business development leader’s job is to sort through all of this data and present a reasonable case to the buyer’s senior management and/or board of directors for approval.Effective business development professionals need to be in constant contact with the various function heads throughout the due diligence process.This allows the leader to stay on top of critical issues and deal with them on a real-time basis so as not to be surprised by “deal-breaking” issues at the end.Interim deadlines for preliminary feedback on major findings should be established for the deal team members.This normally happens throughout the due diligence process in informal meetings and discussions.Each member of the due diligence team will write a report on the findings and critical issues from his or her area.These reports are circulated to all team members and the buyer’s senior management to give a broad perspective on the issues.The interplay of ideas among the different functions often provides a valuable perspective on issues and a plan for handling them.For example, an issue regarding an exorbitant bonus plan that was brought to the surface by the HR team affects not only HR, but also finance (i.e., 95Copyright © 2007 by The McGraw-Hill Companies, Inc.Click here for terms of use.96CHAPTER 7the cost to maintain the plan), legal (to analyze the terms and conditions of the plan), and integration (to determine how this plan can mesh with the buyer’s existing policies).POST-DUE DILIGENCE COORDINATION:SUMMARIZING RESULTSThe diligence reports prepared by each of the functional areas provide the basis for the deal approval presentation to senior management.However, there is far too much detail in these reports for the senior management team to digest.Business development professionals play a valuable role here, attempting to distill the relevant issues from the large amount of data amassed during due diligence while being careful to highlight all of those issues.A balanced presentation needs to be made so that the board of directors can make an informed decision.This takes discipline on the part of the deal team.By this point, a huge amount of time and effort has gone into the deal.The business development leader normally has a vested interest (i.e., incentive compensation, prestige, career development, and so on) in getting the deal to happen.However, this must not cloud his or her judgment on the deal or how it is presented to the board of directors.All points of view must be considered for a balanced presentation.As recent history has shown, the consequences of pushing a bad deal too aggressively are much more severe than the upside to be gained from doing the deal.SENIOR MANAGEMENT APPROVALThe senior management approval process can be extremely difficult or very easy, depending on (1) your company’s attitude toward acquisitions and (2) senior management’s level of involvement in the process up until this point.Some firms have more of a “growth mindset”that makes them more willing to pursue acquisitions as a way to fuel business growth.They are used to looking at large, distinct projects and the risks and rewards associated with them [ Pobierz całość w formacie PDF ]