Companies that treat M&A as a project typically build and get approval for a company’s valuation only once, during due diligence, and then they build these targets into operating budgets.

Valuation targets are set early on and are virtually locked in by the time integration starts. This forces the organization’s aspirations down to the lowest common denominator by freezing expectations at a time when information is uncertain and rarely correlated with the real potential of a deal—overvaluing or undervaluing synergies more than 40 percent of the time, by our estimate. The reason is simple: financial due diligence is conducted with intentionally imperfect information, as each side does its best to negotiate favorable terms in short time frames, and it’s typically focused on likely value instead of potential value. This is appropriate for managing the risk of overpaying, but it’s not the way an operator would actually manage a business to maximize its potential.
(McKinsey & Company, 2013)


Managers devote their attention to finding a buyer but seldom scope deals from a potential buyer’s point of view, even as they struggle to figure out exactly what should be included in the sale, apart from the productive assets that are its centerpiece. They often think about the separation process only secondarily, assuming they can separate a business and worry about stranded costs later. …

When one European private-equity firm, for example, didn’t get all the answers it sought about a company it was negotiating to acquire, it raised the level of assumed risk in its valuation model, suppressing the value of the deal and lowering the price it was willing to pay. To prevent such problems, a US industrial company divesting a subsidiary conducted a detailed analysis of its true sales, general, and administrative costs and, by clearly defining which activities were attributable to the business being sold, found them to be tens of millions of dollars lower than current allocations. That exercise provided detailed information for potential buyers, increased the profit of the business being sold, and helped get a higher price for the deal.
(McKinsey & Company, 2013)

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