Mergers and Acquisitions
 

IES is the next generation activity-based analysis for Mergers and Acquisitions

• Mergers and Acquisitions: The current practice of driver-based (i.e., activity-based) analyses of mergers and acquisitions is described in the following references:

  •  Anderson and Kaplan’s, Time-Driven Activity-Based Costing, 2007, Harvard Business School Press, Chapter 6, “Fast-Track Profit Model"

  • Anderson and Prokop’s article: “Acquiring Profit Opportunities: Rethinking M&A,” July 2005 (See M & A Model).

The current practice is summarized with the following quotes from both references:

“An emerging way private equity funds are improving returns is by employing sophisticated Profit Models to identify profit opportunities in advance of an acquisition, so the acquirer can now know the profit improvement opportunities in great detail, up front.”

“According to Boston Consulting Group, “the acquirer needs to take an all-encompassing view of the value that might be created or lost in a prospective transaction.”

“Having a deeper understanding of profitability drivers expands the analysis from how high a multiple of existing EBITDA to pay, to how much the acquirer can quickly increase the target’s EBITDA by taking actions to transform unprofitable operations into profitable ones. In this way, profit enhancements become a stronger driver of value than changes in multiples, though profit enhancement does not rule out an increase in the EBITDA in the eventual resale of the company.”

“Time driven activity-based costing, introduced by Mr. Steven Anderson and Dr. Robert Kaplan, is the cornerstone of a new solution that has enabled organizations to build exactly what the private equity world needed.”

“In less than one week, your team can have detailed profitability of every customer, order, product, service, sales representative and vendor. Where are the losses being generated, and exactly why?”

“As such, it can be used to build support for change and, in the process of building support for change, can help ensure execution against the value creation plan.”

“In short, the Fast Track Profit Model can be the ultimate competitive advantage in a white-hot, competitive and crowded private equity market.”

• IES Benefits, given current practice’s limitations

  • Fast Track Profit Model is a descriptive model (See Types of Models and One Model, page 2); it describes how to do the thing right. 

    •     IES is a normative model that describes the right thing to do.

  • As such, Fast Track Profit Model does NOT give the acquirer “an all-encompassing view of the value that might be created or lost in a prospective transaction.”

    • IES identifies additional profit opportunities by relaxing the Profit Model constraint of a fixed forecast. (See One Model, page 3)

  • In “ensuring execution against the value creation plan,” the Profit Model must treat forecasting, capacity utilization and budgeting as three sequential steps (See Palladium)

    • IES treats all three of these steps simultaneously and optimally.

    • Further, with proprietary variance analyses techniques, IES keeps the driver-based plan always focused on the maximally profitable demand the company can make and fulfill.