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Day 136 MIT Sloan Fellows Class 2023, M&A and PE 10 "Technical M&A by PE"

M&A ML/AI MIT SFMBA Strategy finance technology

How we should evaluate technical capability in M&A from PE perspective? Is there enough room to improve? How was the price? Over-pricing or underestimated?

 

We reviewed three acquistion targets, Seagate-Hard drive manufacturers, McAfee, and Twitter. From those cases, we will find out the characteristics of LBO in the hardware, software and social media industries. 

 

Analysis 

Seagate

  • Pros: Stable cash flow, suitable for servicing debt. Low EV/EBITDA multiple, potentially undervalued.
  • Cons: Low growth, low margin business, limiting value creation potential. High R&D, depreciation, and CapEx, reducing free cash flow. High competition, posing risks to market share and profitability. Existing 40-50% debt level, limiting additional leverage capacity.

McAfee

  • Pros: Growing cash flow and predictable revenue from the subscription model. Low debt level (10-20%), allowing for additional leverage. Top brand in the security industry.
  • Cons: High EV/EBITDA multiple, making it expensive to acquire. High R&D cost. Risk to lose significant share if it loses relationship as OEM.

Twitter

  • Pros:Strong user base and network effect. Exponential growth potential.
  • Cons: Extremely high EV/EBITDA multiple and high market value, making it expensive to acquire. Uncertainty from privacy regulation. Fluctuating revenue, posing challenges to debt servicing. Lower monetization power compared to Facebook. Struggles with average revenue per user (ARPU).

Industry characteristics and recommendation

Hardware

  • Pros: Stable cash flows and potentially undervalued firms.
  • Cons: Low growth, high competition, high capital expenditure, and existing debt levels. Also reliance on supply chain network. 
  • Recommendation: PE should be cautious when targeting hardware companies, focusing on those with strong competitive advantages and operational improvement opportunities.

Software

  • Pros: Growing cash flows, predictable revenues, and low capital expenditure.
  • Cons: High valuations, potentially limiting LBO returns. Reliance on OEM network. 
  • Recommendation: PE should target software companies with strong subscription models and value creation potential, while being mindful of high valuations.

Social network

  • Pros: Strong user bases, network effects, and growth potential.
  • Cons: High valuations, fluctuating revenues, and monetization challenges. Privacy concerns.
  • Recommendation: PE should be cautious when targeting social network companies, considering the high valuations and risks associated with fluctuating revenues. Firms with strong monetization strategies and growth potential may present opportunities.