Private-Equity General Managers (GPs) Perspective of M&A Deal Evaluation... A key reason for doing an M&A deal is, of course, the synergies that can result. By increasing the new entitys combined earnings, synergies can add enough value to make the combined company worth more than the two individual companies were before the merger. It is important to note that the increased value results from the synergies created, not from the deal being EPS accretive or dilutive. It is quite possible that highly dilutive deals offer the greatest opportunities for delivering synergies. An argument sometimes put forward to support the myth that EPS accretion equates to value creation is that people believe it does. This becomes reality as the misperception is priced into the stock. M&A can deliver significant competitive advantage and value to shareholders, but the criteria by which to assess just how much must answer fundamental business questions: • Is the proposed merger strategically logical? • Will it deliver cost, revenue, or other financial synergies? • Will it build management or other capabilities? • Is the combined company capable of delivering the synergies? Any value an M&A transaction creates must translate into future cash flow, resulting from synergies in three value-creation areas: topline growth, operations productivity, and asset and capital investment rationalizations. Then, theres the crucial question of how much to pay for a deal and who will realize the value it creates. If the net present value (NPV) of future synergies is paid to the selling shareholders in an acquisition price premium, even the most synergistic of mergers can result in value destruction for the acquirers shareholders. The moral of the story is this: Too often, too much emphasis is placed on whether a deal is EPS accretive or dilutive. These are time-honored metrics that appear sensible but in reality do not answer the most important question: Should we do the deal? Lets review the two commonly held myths and why they dont work as M&A evaluation measures: (1) EPS-accretive transactions create value? Not necessarily. Accretion is a relative measure that simply shows the company being acquired has a lower P/E rated stock. (2) EPS-dilutive transactions are value destroying? Again, not necessarily. In fact, EPS-dilutive transactions can increase value when the target company has good growth potential and the strategic logic for the deal is strong. The fact is that EPS analysis is not a useful tool for evaluating the merits of proposed M&A transactions. Accretion or dilution is a fact of doing deals but is not a measure of potential value creation. For that, you need to examine the deals business fundamentals.
Posted on: Wed, 30 Jul 2014 10:30:27 +0000
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