"Investment Banking is 10% Financial Analysis and 90% Psycho-analysis" – André Meyer  This blog is about the "other 90%"…

Investors are obsessed with “quality” businesses that have the potential to be a lasting and successful player in their market. But, how to define “quality”? .

It can mean many things. Let’s take operating margin. If the core activity is only modestly profitable, there is limited buffer to save the company from an economic storm, or a price war. On the other hand, low margin may be good, if it provides a bargain entry price with an easy upside upon correcting obvious management errors.

boatv2The third leg of the “quality-stool” is the defensibility of the company’s market. There are two components here: is there, or could there be early competition, i.e. when barriers to entry are low? If so, would margins come under pressure diminishing the upside in growing the company?

The other component is “relevance”. It’s nice to have an entrenched market, unless no one buys your product. How relevant is to be a dominant operator of public payphones, or the producer of gas convectors, anymore?

A good question before investing is therefore: Would anyone miss the product if the company went out of business? If the product is only “nice-to-have”, or if there are better/cheaper substitutes, then be careful sinking your money into that business. Istvan Preda

PictureWhichever is your client, the way to sell a company is to make both buyer and seller happy. Sounds like an impossible mission? What makes the seller happy is to get the maximum price, i.e. more than his business is worth. The buyer has the opposite objective: to steal a bargain.

I am afraid the math will not work here… unless the deal is worth more than what the parties put in and get out, respectively. This more is the ideas the merger advisor contributes to boost the perceived (and actual) value of your business. Quite simple. A merger advisor has his “growth glasses” on while the seller’s sight has gone dim. The advisor is already thinking for the buyer, before he had a chance to ponder the opportunity.

In other words, the seller gets to sell a new vision he never had… while the buyer receives a pre-cooked meal with serving instructions. Both get more than the subject of the sale. They benefit from the experience of an outside specialist focused on bridging the value gap between the seller and the buyer. The bridge is built from the experience and the creative thinking of the strategic-minded adviser.

This is what differentiates the merger advisor from the business broker. The broker peddles companies. The merger advisor markets business investments.