Hi guys:
i'm looking to model a public company that uses a consolidation-by-acquisition strategy in its industry. It makes 2-5 acquisitions every 5 year period or so (the target companies tend to be private companies). How should I model that? Do I model core business growth rate without worrying about potential acquisitions in the future?
Does it change if I want to analyze this company for a potential take private?
Thanks!
Hey chips_ahoy, I'm the WSO Monkey Bot and I'm here since nobody responded to your topic! Bummer...could just be unlucky but one of these topics will help shed some light:
Fingers crossed that one of those helps you.
When looking at high level business growth, you're going to need to make an assumption on how much they'll grow per year. Ideally, this will be done with some insight from the Company, but I'm guessing this is more of a personal project and you don't have that. In this case you can use past growth with any anecdotes given in past filings and earning calls.
If it were me, I would project core business growth rate in line with historical performance and industry outlook. In the write-up, mention acquisition strategy with an overview of past targets and maybe some future targets if available. Mention typical target size and fold in if they seem competent in realizing synergies and folding in acquired companies.
Long story short, there's no "right" way to model anything. The framework is that you make assumptions to project future growth/earnings/revenue/profits and as long as you have a reason behind your assumptions, you're good.
I'd check some of the company's investor decks / earning transcripts to see if there is an overview of their acquisition strategy (size, revenue, target multiple to pay, etc.). Given their acquisitive nature, I would guess there is some sort of framework that they have disclosed.
Using either assumptions the company has disclosed (or ones you come up with) you can build a SOTP. valuation You project out the standalone business and get the value of that piece per share and can run various M&A cases to get to the incremental value they will achieve from an acquisition strategy.
Assuming your core business assumptions are relatively in-line with the market, you can also use this to "reverse DCF" what the market is implying from M&A. Say you value the core business at $10 / share, and the stock currently trades for $15, you can know figure out what sort of M&A activity will need to take place for the shares to be properly valued today and whether this is realistic or not.
In terms of a take-private scenario, buyers will not give full credit to future inorganic growth, or will factor in future capital investments to fund this strategy when modeling out a target IRR. So if you have valued the M&A piece $5 / share, a take-private buyer would likely value it at some % of that.
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