Assess how an acquisition creates value, how much the buyer pays and how the purchase is financed as connected decisions.
01 · The picture
Assess how an acquisition creates value, how much the buyer pays and how the purchase is financed as connected decisions.
Follow the decisions
01Value creation
02Price
03Funding
04Downside test
02 · The idea
How I understand it.
Once acquisition is a serious option, examine value creation, the bid and the funding together. Explain how the buyer can improve the business and give each expected benefit an owner, a cost and a plausible timetable. Compare the purchase price with a range of values supported by operating assumptions. Test what happens when revenue disappoints, integration takes longer or savings arrive late. Examine how the financing behaves under those same conditions, including the timing of cash commitments and repayments. A strategically attractive purchase can still leave the buyer with little room for error at a particular price or funding structure. Keep the assumptions visible and distinguish benefits the buyer can deliver from hoped-for outcomes. The acquisition decision should survive a credible downside test as well as the expected case.
03 · A fictional example
Put it into a business.
A regional service company considers buying a competitor. Its plan assumes shared administration and better route density. The team estimates the costs of combining systems, tests lower customer retention and delays the savings in its downside case. It then checks whether the proposed repayments remain manageable. The bid reflects the benefits the buyer can credibly deliver and the risks it would carry.
04 · Bring it into the room
Which acquisition assumption most affects the value you could realise and your ability to meet the financing commitments?
One decisionOne next actionOne way to check
Where this note comes from
An original explanation drawn from my saved learning material. The worked example is fictional.
Harvard OPM · Unit 3Course reading or session material
Module Overview - Finance (Lerner)
PDF p. 4; Session 4, valuing and financing an acquisition
These notes collect my interpretations and applications. The schools and authors retain their original teaching materials.