With so much capital readily available, and acquisition prices in “nosebleed territory,” it is important to remember that in the M&A game a key skill is knowing when to walk away.
Graham Elton and Rolf-Magnus Weddigen of consultants Bain & Co, writing in FTfm’s Talking Head column, say executives should learn from the private equity industry in deciding which deals to pursue.
Too often, ahead of an acquisition, the due diligence process tends to over-estimate the likely synergies and simultaneously fails to spot significant problems. Executives tend to develop a mental image of the target company — and that image gets turned into a story that management tells itself about the deal.
Better to take the private equity approach, which typically involves building a proprietary, bottom-up view of the target company and its industry, rather than relying on secondary sources and biased forecasts provided by the company itself.