Acquisitions and Valuations - 2021


3 Insights from a Business Acumen Perspective

It’s starting up again and this time it’s going to be bigger and bolder than anything we’ve ever seen before.merger-business-acumen Welcome to Acquisitionmania 2021. Microsoft’s announcement of the acquisition of Nuance for nearly $20 billion is going to be just the beginning of what will surely be a wild ride as the economy comes back from the pandemic and the pent up demand for big deals plays out over the rest of the year.

One of the many learnings coming from the pandemic is that if your company survived, that’s great. It’s resilient and quite valuable. If your company has thrived, then it’s worth a lot of money! A lot of strategy, hard work, and being in the right place at the right time has positioned strong companies to get even stronger or to be acquired, providing their investors incredible and well-earned returns on their investments.

We believe there is going to be a lot of merger and acquisition activity over the next few months for three primary reasons:

  • There has been a lot of money sitting on the sidelines for the past 14 months.
  • It is a lot easier and quicker to buy then to build right now.
  • The risk is decreased for those companies that survived and thrived through the pandemic.

In our business simulation-centric Business Acumen programs I am often asked about the opportunity to do mergers and acquisitions and our participants are often surprised when I say, “Yes, but first you need to go find a great deal, develop a strategy, find the capital, and then bring it to your board of directors for approval.

If they are able to do that, then the last big obstacle is figuring out the valuation. So how does a great company like Nuance, whose revenues are a little under $2 billion a year but was losing money, get sold for about 8 times revenues?

There are 3 Business Acumen Lessons to Consider:

1) Valuation Techniques

There are several tools that you can use to quickly determine a companies value including:

  • Multiple of revenue – Typically 1 times to 10 times is a decent and wide range depending on the industry.
  • Multiple of Future Cash Flows – Typically the net present value of the projection of the next 10 years’ worth of positive cash flow.
  • Multiple of EBITDA – Typically 5-20 time is decent and wide range depending on the industry.

 2) Opportunities and Efficiencies

Many of the acquisitions we are going to see over the next few months will be because there are great opportunities for growth and increased efficiencies. Many executives are looking at a relatively small window and it will take way too long to build it so if there is something very strong right in front of you, it’s worth a big premium to acquire it now.

You can rest assured that if Microsoft didn’t make their big move, the second largest acquisition in their history, LinkedIn, Google, IBM, GE, or any of the innovation leaders would have gobbled them up.

3) Spin-Outs and Portfolio Optimization

One of the newer techniques of value creation through M&A is the spin-out after a deal is done. Company A acquires company B to form Company AB, a bigger more powerful organization. But within Company AB are smaller companies such as Company C and Company D that can be separated from the new parent company to create new companies that unlock hidden value. When that occurs, the shareholders of Company AB get even more value once they get the cash or stock in the new baby companies.

In summary, leaders, managers, and employees should get ready for a lot more exciting change. Unlike times past when big deals were extremely risky, the last 14 months has taught us about being strong, being resilient, and taking smart risks to grow. Having the Business Acumen skills will help you navigate through the next chapter.

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Robert Brodo

About The Author

Robert Brodo is co-founder of Advantexe. He has more than 20 years of training and business simulation experience.