M&A: A Practical Guide to Doing the Deal, 2nd Edition

CHAPTER 11 To Facilitate Financial Projections, the Buyer Needs to Classify the Target as a Mature, Growth, or Cyclical Business

What is a growth company? A mature firm? A cyclical business? The M&A industry uses these terms regularly, but what do they mean? Chapter 11 provides the tools for making these classifications, and it builds on the analytical foundation constructed in Chapter 10.

In Chapter 10, we studied the results of P.F. Chang’s, an established business in a mature industry. In this chapter, we consider markers that place a business in its corporate life cycle.

Most M&A textbooks focus on the mature, established business. This is appropriate for the university environment, where the student is getting accustomed to financial analysis. Examining a business with minor variances from year to year is a good place to start. As the student transforms into a practitioner, though, he is subject to a rude awakening. The M&A landscape is littered with firms that fall outside of the teaching model. Many firms exhibit sharp changes in year-to-year operating performance—for both positive and negative reasons. A healthy percentage of acquisition target firms lose money. Others complicate the buyer’s job by completing numerous acquisitions, so one doesn’t know where the real business ends and the new acquisitions begin.

Company Classifications

Wall Street likes to summarize a company’s attributes in a shorthand manner, preferably within six classifications. The buyer’s financial ...