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M&A: A Practical Guide to Doing the Deal, 2nd Edition by Jeffrey C. Hooke

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CHAPTER 12 How Practitioners Forecast an M&A Target’s Sales and Earnings

The buyer’s M&A analysis always incorporates projections of the company under study. Before jumping into the business of making projections, however, you should know popular techniques and common pitfalls. Moderating optimistic assumptions with reality checks is an important part of forecasting.

The nuts and bolts of projections, such as assigning growth percentages to revenues and applying inventory-to-sales ratios, are usually grounded in recent history. Takeover candidate P.F. Chang’s was a good example, as its M&A forecast adhered closely to past trends. See Table 12.1. Key statistics such as sales, gross margins, and EBITDA were anticipated to improve modestly over P.F. Chang’s historical results, and neither a recession, a new competitor, nor a major market change was predicted.

Table 12.1 P.F. Chang’s Historical Results and Projections (In millions, except percentage)

Source: P.F. Chang’s, Proxy statement, May 15, 2012.

Actual Projected
2009 2010 2012 2012 2013 2014 2015 2016
Sales $1,228 $1,243 $1,239 $1,261 $1,380 $1,490 $1,653 $1,775
EBITDA 140 142 131 121 143 164 194 218
Sales growth 7% 1% 0% 2% 9% 8% 12% 7%
EBITDA growth 15 3 (8) (8) 18 15 18 12
EBITDA margin 12 12 10 10 10 12 12 12

Note: Sales and EBITDA show a steady, if unspectacular, rise in this conventional projection, which has no recession.

The vast majority of projections follow this pattern of the future reflecting ...

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