Thursday, October 19, 2006

Balance Sheet Method

When a business buyer and seller come to the table, the often tough question of how much is a business worth must be answered. There are many valuation methods that are used, some very simple to understand and some very complex often involving higher level differential math. In most cases, parties are more happy with simpler methods that are easy to conceptually grasp. Here I will show you the most simple method of valuating a business, the Balance Sheet Method. In the balance sheet method, one only looks at the business's assets and liabilities to determine exactly how much it is worth. Let's take a look at a quick simple example. ABC Corporation has this balance sheet: Assets Liabilities Cash $100,000 Accounts Pay. $50,000 Factory $1 million Mortgage $500,000 In this example, there are $1.1 million in assets and $0.55 million in liabilities. The business is therefore worth $0.55 million, or $550,000. If you are familiar with GAAP, the body of general accounting standards, assets are carried at book value, which is often much less than market value especially for appreciating assets like real estate. Many will therefore use the Adjusted Balance method which takes into account the market value of assets. Let's say we reconsider the above example, and we see that ABC bought the factory 10 years ago. The industrial real estate in its market has appreciated so now the factory would sell for $1.5 million today. Now the worth of the business is $1.05 million instead of $0.55 million. Whether one uses the balance sheet method or more popular adjusted method, the approach is looking at what the business is worth based off its asset alone. It takes nothing into account of how much a business has in earning power. The balance sheet method lets one take the perspective of "I walked away from this business tomorrow, sold everything that it owns, how much do I get?"

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Wednesday, December 29, 2004

Bestselling Corporate Finance Books

Wednesday, November 24, 2004

Increasing Board of Directors M&A Responsibilities

According to Ian Cookson (Corporate Finance Director at Grant Thornton LLR), as a result of recent higher levels of governance, both in the courts and by new legislation such as The Sarbanes-Oxley Act of 2002, directors are likely to become increasingly involved in acquisitions, including evaluating transaction strategy and post-acquisition integration plans.

Cookson ( recommends the following useful shopping list in the "Financial Excutive" of Oct2004 for Key Responsibilities of the Board of Directors during an M&A:
  1. What are the integration plans?
    (Short-term actions, Communication plans (immediate and ongoing), Synergy delivery plans (and likelihood they will be
    achieved), Internal controls compliance plan, Individuals accountable)
  2. Is the strategic rational robust?
    (Closeness of fit with existing business, Acquisition's ability to leverage strengths and resolve weaknesses, Do economic realities match the story?, Other targets/options explored)
  3. How will we manage implications of people and culture?
    (Closeness of cultural fit, Implications for future ways of working, Retention and rewards for key people, What is it that makes the business successful?, How this wilt be retained and built on?)
  4. Viewing risks (in above) in context of price
    (Valuation, comparables, financing structure, Fairness opinion is independent, Due diligence is robust and directed to uncovering potential liabilities)
  5. Board litigation protection
    (Process, deliberations and analysis documented, Use of independent experts)
  6. Value added by board members
    (From personal experiences, Not simply monitoring management, Balanced perspective on weighing risks and rewards)

It is expected from board members to add considerable value to the above areas and to bring additional perspective to balancing the risks and benefits of the acquisition. If you're in an M&A trajectory right now as a Director and you're starting to feel a little bit uncomfortable: don't worry: Mr. Cookson expects an expanded role of independent advisors to the board likely to follow suit, moving well beyond fairness opinions into the above areas ;-)

Wednesday, November 17, 2004

CF specialists join professional services firms

What do you do when you've clocked up 10, 15 or more years' experience at an investment bank and decide it's time for a change? An article in Euromoney (Oct 2004) reports on the apparent growing popularity among investment bankers in Europe to take off to a professional services firm. These companies, intent on expanding CF and transactions services teams, have been snapping up banking talent and are seeking more.

KPMG hired Stephen Dunn from the leveraged F. department of Sumitomo Mitsui Banking as manager in its debt advisory team to provide advice on structuring new debt issues, refinancing existing obligations, structured F., securitizations and leasing products. KPMG also added four bankers to its project F. team. When it comes to advisory work, particularly in mergers and acquisitions (M&A), the professional services firms are seeing a decent amount of deal flow where the investment banks are floundering. The amount of activity around each transaction has increased dramatically.

Deloitte is looking at bankers with expertise in vibrant M&A sectors where the firm can further expand its business or at those candidates that have a good track record in bringing in new deals.

PriceWaterhouseCoopers has more than 2,4000 staff in its transactions services businesses alone, bringing together M&A bid support and defence, due diligence and structuring.

And Ernst & Young says the amount of activity around M&A transactions has increased dramatically.

The downside is even the most senior hires aren't going to have the earnings potential they might expect at an investment bank but on the other hand there is more job security and therefore less chance that salaries and bonuses will fluctuate from astral to zilch in a business cycle. People who have made the move argue that it is also a less competitive, confrontational environment. So if you'd like that: what are you waiting for?

Tuesday, November 02, 2004

Dealmakers and Value Creation

Don't miss the article on dealmakers and value creation by Danny Ertel. He writes in the Harvard BR of November 2004 that most competitive runners will tell you that if you train to get to the finish line, you will lose the race. To win, you have to envision your goal as (just) beyond the finish line so you will blow right past it at full speed.

That makes good advice for managers, especially when you're dealing with complex negotiations such as in alliances, mergers, acquisitions and outsourcing. In corporate finance it often pays out to make sure both parties interests are aligned, even if that means leaving some money on the table. The most expensive deal is the one that fails... A dealmakers attitude can be killing for long-term value creation. Ertel provides five tips that can help a negotiation team to work with the right (the-real-value-is-created-during-implementation) mindset:

  1. Start with the end in mind
  2. Help them prepare too (surprising or overbluffing the other side does not make sense)
  3. Treat alignment as a shared responsibility (if your counterpart's interests are not aligned, it's your problem too)
  4. Send the same one message to both implementation teams
  5. Manage negotiation like a business process (prepare in a disciplined way and conduct post-negotiation reviews)

Tuesday, September 14, 2004

M&A lessons for boards

I just finished reading a superb new book on value based management called "Questions on Value". One of the 11 papers in the book I liked most is about "Achieving valuable growth through M&A - Boardroom lessons for the acquisition game".

This article is a contribution of Mark L. Sirowe, Global Leader of the Mergers and Acquisitions practice of Boston Consulting Group and Professor at Stern University (New York).

It shows Mr. Sirowe is both a seasoned M&A consultant and an excellent lecturer. The article reads indeed like very good lessons at boardroom level on:
- how companies can establish strategic M&A processes and become an "always on company" as Sirowe calls it, and
- what boardrooms should go through on proposed deals.

To give you just a taste of the article, as a final M&A racing diagnostic Sirowe recommends boards to ask/think over the folowing questions:

  • Is there evidence this deal emerged from a clear strategic perspective?
  • How is this deal consistent with our long-term objectives for customers, markets and products/technologies?
  • What are then stand-alone expectations of acquirer and target?
  • Where will performance gains emerge as a result of the merger?
  • Are the projected performance gains in line with the premium being paid?
  • Which competitors are likely to be affected by the deal and how will they respond?
  • What are the milestones in a 12-24 month implementation plan?
  • What added investments will be required to support the plan?
  • Who are the key managers responsible for implementing the plan?
  • Which pieces of either company are good candidates for sell-off or split-off?
  • Why is this deal better than alternative investments?

Kudos to Mr. Sirowe for this article.

Friday, July 16, 2004

Citigroup dominates global M&A market

According to a CF Magazine survey, Citigroup is once again dominating the worldwide market for Mergers and Acquisitions. According to the survey, knowledge of industry and market trends is the most important reason for choosing an investment bank, and insight into the corporates' own business is a close second. Relationship factors in choosing an advisor came fourth with 66% of respondents rating them as important.

Two-thirds of respondents say they f. their acquisitions through available cash. This highlights the reluctance of companies to risk capital markets activity to f. deals. Fifty-six per cent of respondents used their investment bank for both advisory work and financing and there is a move towards lending and advisory being linked “as long as it is a reasonable decision for the C. to involve the universal bank”.

Tuesday, June 29, 2004

The Drivers of Success in Post-Merger Integration

A merger, integrating two relatively similar-sized companies, is a difficult process (more difficult than an acquisition). Many mergers fail. Everybody knows that. Marc J. Epstein thinks there are seven determinants of merger success: 1. strategic vision 2. strategic fit 3. deal structure 4. due diligence 5. pre-merger planning 6. post-merger integration 7. external environment.
Epstein claims the factors 5 en 6 have enjoyed relatively little attention and recommends best practices for PMI, which he calls the five drivers of successful post-merger integration:
I. Coherent Integration Strategy (reinforcing this is a "merger of equals")
II. Strong Integration Team (discrete, full-time function with ample resources and strong leadership)
III. Communication (significant, constant and consistent)
IV. Speed in Implementation (planning is essential, majority of that should be ready before the announcement of the merger)
V. Aligned Measurements (with the merger strategy and vision, including targets and milestones, financial and non-financial, long term)
I enjoyed reading this article and recommend it to people involved in a merger. You can order it by emailing