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Table 3 M&A evaluation with different combinations of uncertainty and controversy

From: Constructing M&A valuation: how do merger evaluation methods differ as uncertainty and controversy vary?

HIGH CONTROVERSY ISSUE LISTS Cases: *BigMedia (BigEnergy, Chip) • Example: unrelated diversification. • High controversy: inconsistent with some long-term views; many stakeholders. • Low uncertainty: predictable customers; well-known sector. • Valuation focuses on finding the route to minimum opposition/maximum consensus. • The vision and long-term goals of a firm are key terms and used frequently during the valuation to convince and negotiate with others. • Valuation process includes identifying possible sources of controversies (issue lists) beforehand in order to develop logic to overcome or adjust to the challenges. • Financial valuations are used if they help convince others. Financial valuation typically is not useful for decision-making because of never-ending debates on assumptions but useful as a medium of communication and a list of controversial issues. • Lead by people with legal background. The issue list method is also useful during due diligence. Managers use this approach when they need to compete about how to use internal resources. STORYTELLING Cases: *BigMobile (SmallMedia) • Example: related diversification into new geography. • High controversy: competing preferences and doubts about whether to expand; limited success in prior global expansions. • High uncertainty: qualitative factors, such as global risks and culture, which are new for the buyers. • Key activities during the valuation process are designed to construct stories. To be accepted, a story should be stable during discussions, simple, appealing to stakeholders, and consistent with the buyer’s goals. The story should allow maximum consensus with informative decision-making. • Strategy development precedes financial analysis (“finance follows strategy”). Valuation and strategy development are inseparable. Marketing, operation, and turnaround strategies are more important to evaluate the project than financial valuation. • Evaluation led by team of internal staff, drawing on investment bankers and lawyers to assist with deal structuring and due diligence. The higher the ranks of managers, the more seriously the managers take the storytelling methods relative to alternatives.
LOW CONTROVERSY DESKTOP VALUATION Cases: *Portal (SmallEnergy) • Example: acquisition of complementary service. • Low controversy: internal consensus on the next steps to be taken and fit with long-term plans. • Low uncertainty: familiar business model and stable technological trends. • Financially oriented tools of standard capital budgeting analysis: IRR, option pricing, EBITDA multiples, sum of parts analysis, adjusted present value (APV), LBO analysis, and relative values. • Structured process of merger valuation: deal structuring, desktop valuation, partnering analysis, due diligence, negotiation, and updating valuation iteratively. • Evaluation led by investment bankers. CAPABILITY DESIGN Cases: *SNS (Apparel, Card) • Example: new business model with potential complement to existing business. • Low controversy: urgency to do a new project, consistent with the will of top management. • High uncertainty: unclear business model and market. • Little initial financial analysis. Instead, valuation constructs decision-making process to achieve maximum information/minimum ignorance. • Financial analysis is used to develop plausible plans, not to assess investments; substantial burden to rationalize the uncertainties to bear at each contingency. Target value determines whether and which uncertainties to accept. • Evaluation led by management consultants.
  LOW UNCERTAINTY HIGH UNCERTAINTY
  1. The table provides examples of the four categories of evaluation
  2. *The cases the table focuses on (cases in parentheses are other representative deals)