M&A Quick Analysis Worksheet

by Geoffrey James

Tags: Result, Valuation, M&A, Analysis, Target, Final Score, Investment, Finance, Geoffrey James, strategy, strategic planning, mergers & acquisitions, BNET Feature

Every merger and acquisition is different and should be viewed on its own merits. However, there are several rules of thumb that investors and executives use to decide whether a deal makes sense. Unfortunately, the importance of each individual rule varies according to a firm’s specific acquisition strategy. A technology firm that acquires early-stage startups would be crazy to expect them to be profitable from the get-go. Similarly, a medical-services business is likely to care more about the quality of personnel than the assets of the business.

How, then, to quickly decide if a deal makes sense? We’ve put together an assessment questionnaire to help you think through the various dimensions of an M&A decision. The questionnaire is no magic bullet, nor is it a substitute for the hard thinking that must go into a formal due-diligence process. But in just a few minutes, it could provide an early indication of whether you’re on the right track — or heading for an M&A disaster.

Part 1: Financials

Revenue: If the target acquisition candidate has a revenue stream, divide the expected purchase price by the average yearly revenue stream over the past two years.

[ ] The result is less than or equal to 2. (4)
[ ] The result is more than 2 but less than or equal to 3. (4)
[ ] The result is more than 3 but less than or equal to 4. (3)
[ ] The result is more than 4 but less than or equal to 5. (0)
[ ] The result is more than 5 or the company has no revenue stream. (-1)

Profit: If the target is profitable, divide the expected purchase price by last fiscal year’s earnings before taxes, depreciation, and amortization. (If not profitable, score 0.)

[ ] The result is less than or equal to 5. (6)
[ ] The result is more than 5 but less than or equal to 7. (4)
[ ] The result is more than 7 but less than or equal to 9. (2)
[ ] The result is more than 9 but less than or equal to 11. (0)
[ ] The result is more than 11 or the company is not profitable. (-1)

Stock Value: If the target is publicly held, divide the dollar value of the target’s outstanding stock by its last year’s net profit. Do the same for your firm.

[ ] The target’s valuation is more than twice your firm’s valuation. (5)
[ ] The target’s valuation is more than your firm’s valuation. (3)
[ ] The target’s valuation is identical to your firm’s valuation or the target is not publicly held. (0)
[ ] The target’s valuation is less than your firm’s valuation. (-3)
[ ] The target’s valuation is less than half your firm’s valuation. (-7)

Subscore #1: Add up the points for each answer: _____ (SS1)

Part 2: Product

Uniqueness: The target’s offerings are:

[ ] Absolutely unique in this industry (5)
[ ] Better than other offerings (3)
[ ] About average for the industry (1)
[ ] In need of some work to come up to par (-1)
[ ] Obsolete and out of date (-6)

Customer Base: The target’s product offerings have:

[ ] A fanatically loyal user base (4)
[ ] An enthusiastic user base (3)
[ ] A set of early adopters (2)
[ ] Some interested potential customers (1)
[ ] Existing customers who are actively hostile (-5)

Market Share: The target’s product offerings command:

[ ] A major share in a rapidly growing market (7)
[ ] A minor share in a rapidly growing market (3)
[ ] A major share of a mature market (3)
[ ] A minor share in a mature market (2)
[ ] The product has yet to establish a market (-2)

Subscore #2: Add up the points for each answer: _____ (SS2)

Part 3: Personnel

Competence: In general, the target’s management:

[ ] Possesses unique knowledge and experience (5)
[ ] Would be a big asset inside any organization (3)
[ ] Are about average for the breed in this industry (2)
[ ] Would be accepted, but without enthusiasm (1)
[ ] Could do cameos in a “Dilbert” comic strip (-3)

Uniqueness: In general, the target’s employees:

[ ] Possess technical skills that are impossible to find elsewhere (7)
[ ] Would be extremely expensive to recruit separately (5)
[ ] Have compatible skills with your employees (3)
[ ] Are barely adequate to the tasks at hand (1)
[ ] Are candidates for layoffs soon after the merger (-4)

Culture: Our corporate culture compared to the target’s corporate culture is like:

[ ] Manhattan compared to Queens (5)
[ ] New York City compared to Boston (3)
[ ] New York State compared to Arkansas (-1)
[ ] The United States compared to Kazakhstan (-5)
[ ] Planet Earth compared to “Bizzaro” world (-10)

Subscore #3: Add up the points for each answer: _____ (SS3)

Part 4: Your M&A Strategy

Rank the following strategic reasons for your M&A from 5 (highest) to 1 (lowest) according to their importance to your firm:

Improved revenue and profit.
Reduce cash on hand
Obtain advanced technology
Get hard-to-find personnel
Expand into new markets

________ A
________ B
________ C
________ D
________ E

Final Scoring

Multiply A and B and SS1: Multiply C and E and SS2: Multiply D and SS3. Quadruple the result:	_________ _________ _________
Add the subtotals to get your Final Score:	_________

Analysis

Final score is over 300. This is a highly attractive deal. You have obviously done your homework and found a candidate that matches your strategy.
Final score is between 200 and 300. This is an excellent deal. While there may be some challenges, there’s a good chance that the acquired firm will integrate well and help you achieve your corporate strategy.
Final score is between 100 and 200. This is a marginal deal. There are some things about the acquisition that might be advantageous, but there are problems waiting in the wings. Proceed with great caution.
Final score is less than 100. Forget it. Run, don’t walk, to the nearest exit.