Equity Story Validation

Assessing the Attractiveness of Chemical Sector Acquisitions

Potential acquirers endeavour to put a value on companies under consideration primarily by analysing past and current financial performance. However the attractiveness of a target company hinges much more on the future: on how value will be added after the acquisition is completed.

This is the justification for making the acquisition – the “equity story” or “investment thesis”. It is no less rigorous an analysis, but is based on informed opinions, projections, qualitative analysis of industry structures, dynamics and long-term drivers, knowledge of competitors, insights into what is likely happen, etc. In short, it requires broad and deep understanding of the industry.

Cogency’s expert project teams provide rigorous, objective appraisals of management’s view of the company’s future potential, of the strategy they are proposing, and of the assumptions and estimates underpinning (but not necessarily visible in) their projections.

1. If an acquisition target’s management present a well thought-through strategy, Cogency can:

• Assist the potential investor (our client) to translate this into a draft justification for proceeding with the deal

• Rigorously break this justification down into its component assumptions, prioritise these in terms of its sensitivity to each, and systematically investigate them

• Interrogate what has not been said – i.e. what has been omitted (unintentionally or intentionally)

• Provide a thorough, fact-based, objective assessment of the justification – its objectivity, realism, achievability, the threats to its success – or whether management has built in ‘fat’.

• In short, we will “validate the equity story” (see also: “Explanation: Validating the Equity Story”

 2. If the target’s management does not present an adequate strategy or omits key elements from it, Cogency can:

• Revise or supplement the existing strategy, or even develop one from scratch – either in collaboration with our client, the target’s management, or completely independently

• Then as above: formulate a draft justification, define and explore the assumptions, and provide an objective assessment of the justification

Cogency’s work in this area is equally relevant to both financial investors/private equity and corporate acquirers/”trade buyers”. The precise scope of our work, how we will undertake the work programme and the content and format of the deliverables required all vary from case to case, and are agreed at the outset with our client.