To Buy or Not To Buy: A Checklist for Assessing Mergers & Acquisitions
“Companies that act early in an M&A cycle tend to generate higher returns than those that act later. The first movers enjoy the benefits of a larger pool of targets and cheaper valuations than companies that buy later in the cycle. Cheap and accessible financing prompts action by buyers at the end of the cycle. So do bandwagon effects, or what Warren Buffett, chairman and chief executive officer of Berkshire Hathaway, calls the ‘institutional imperative.’”
Credit Suisse’s Global Financial Strategies team has published a new report, “To Buy or Not To Buy.”
- Companies spend more on mergers and acquisitions (M&A) than any other alternative for capital allocation.
- Empirical analysis shows that M&A creates value in the aggregate, but that the seller tends to realize most of that value.
- While the market’s initial read of a deal is not perfect, there does not appear to be a bias.
- Careful studies show that value creation is largely independent of EPS accretion or dilution.
- Buyers see their stock rise when the present value of synergies exceeds the premium they pledge to the seller.
- The form of financing and category can send signals about a deal’s merit.
- We suggest answering four questions in order to assess mergers and acquisitions: How material is the deal? What is the market’s likely reaction? How did the buyer finance the deal? Which strategic category does it fall into?
Click here to read the full report.
See here for a collection of links to other Mauboussin papers.
Henry Singleton’s Standards for Acquisitions
In the earlier post The Great Man Behind Teledyne: Henry Singleton and the recording The Manual of Ideas on Business Leader Henry Singleton, Founder of Teledyne, there is a part starting at 1:12:31 that describes the standards that Singleton had for deciding whether or not a company was a good acquisition candidate for his Teledyne.
The questions that Teledyne asked when analyzing and considering potential acquisitions were:
- Is the company profitable?
- Do they have a good balance sheet?
- Is their profit and loss statement accurate?
- Do they have a clean inventory?
- Is their backlog realistic and well documented?
- Is their management on top of their operations?
- Would management be willing to stay if acquired?
- Have they made long ranged plans to maximize their profit in a sell out?
- Does the business have growth potential?
- Is there opportunity for growth in profit?
- Can cash be taken from the company for use elsewhere?
- How is depreciation counted and is it a significant percentage of profits?
- What is the condition of their physical plant?
- Would this company be a good fit within Teledyne organization and its goal?
See here for a review of the book Distant Force A Memoir of the Teledyne Corporation and the Man Who Created It.
This book is also mentioned in the article What Would Value Investing 101 Look Like? written by Geoff Gannon at GuruFocus.com.
Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. This article is informational and is in my own personal opinion.