Bengaluru is seeing churn and activity in the entrepreneurial ecosystem. Recently, I have come across a couple of mid-size and small companies seriously looking at options to merge. The world is changing rapidly and entrepreneurs want to seize the moment. M&A is seen as one option for the smaller companies to consolidate and address the challenges ahead.
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Some deals work and some do not succeed. Here is a quick first-cut of the framework that I have put together when looking at any investment/M&A planned; the PBRT framework. It is so named, because of the memory tag… PBT (profit before tax) which is a key financial parameter many professionals look at. So here is the PBRT formula for review of any potential deal in a company:
- People: Everything starts with the people involved. Are the people (key founders/directors) in the two organisations comfortable with each other? Looking at people involves many aspects, both professional (qualification, experience) and other aspects as leadership, team spirit and most importantly… value systems, i.e. integrity and ethics. People need to be compatible, and comfortable with each other, if there is a disconnect, however great the combined company looks on paper, chances are value may not be created in the joint company, it may be depleted.
- Business: Next is the expectation from the combined business, expected markets, revenue, profits and value that can be jointly created. One needs to keep an eye on the value drivers and the barriers to growth in the days ahead. Some class notes on valuation are available for download at www.slideshare.net/anjanavivek .
- Regulatory: In the past this has often been neglected, with many persons having an attitude that legal and tax issues are minor aspects that need not be a cause for worry. The case of sweat equity in the IPL saga, the cases of deals becoming invalid due to ownership beyond permissible limits as per Indian law, etc. are examples of this. Companies can factor in the impact of various laws and tax on the proposed combined venture, before taking a view on how they should proceed.
- Time: What looks important today may not be meaningful in the future. The business plan may be viewed in three time frames, immediate term (1 year); medium term (3-5 years) and long term (10-15 years). The first is to look at the long term, i.e. the vision and dream of the future, next one looks at immediate issues to be addressed and advantages one has. The midterm plan sets both these into perspective.
Of course, any framework is only as good as the quality of thought that goes into using it. Thinking through multiple aspects of any potential deal can help in taking a more informed decision, though it does not guarantee success. Best wishes if you are looking at deal making.