M&A: A Practical Guide to Doing the Deal, 2nd Edition

CHAPTER 4 The Three Financial Tactics That Dominate the M&A Business

How do Chapter 3’s 10 motivations for acquisitions translate into a higher stock price for the buyer? This chapter shows how the 10 motivations distill into three financial tactics, which are repeated time and time again in the M&A business. These tactics are: (1) synergies from like-like combinations; (2) the “swan effect,” where the deal favorably changes the investment market’s perception of the buyer; and (3) arbitrage, a process through which an acquirer—whose stock might trade at 10× EBITDA—purchases multiple smaller companies at 5× EBITDA (and the resultant math increases the acquirer’s earnings per share [EPS]).

As you know, the overreaching objective of any M&A deal is to assist the buyer in developing sustained growth in sales and profits. Absent other factors, such a track record enhances the market value (or stock price) of the buyer, keeping shareholders, board members, executives, employees, lenders, and other constituencies’ content. The reasoning behind a specific deal is found within the 10 motivations, of which three—(1) buying either a competitor, (2) an identical firm in a new market, or (3) a like business—represent the preponderance of transactions.

The financial rationale underpinning most acquisitions is distilled into three tactics:

1. Cost cuts, revenue gains. The buyer obtains synergies from “similar business” acquisitions, with little change in the buyer’s P/E multiple.
2. The “swan effect.” ...