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

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 ...