Now look closely at the target’s balance sheet. An excessive debt-to-equity ratio should be a red flag. How will this additional debt load impact your credit rating?
Next stop is the cash flow statement to give you an idea of the target’s capacity to service its debt. The income statement can provide a glimpse of the target’s profitability and top-line momentum. Be sure to scrutinise both historical and forward-looking financials.
Remember: numbers alone won’t provide adequate information. You want to check out a company’s reputation, its banking relationships, its relationships with customers and suppliers.
Another consideration is how the target and its ecosystem have been affected by the Covid-19 crisis. How has it adjusted its product lines, capacity or management philosophy due to shifts in its industry? Predictably, sectors such as IT and software are doing better than others, such as hospitality and travel.
Draw up a hypothetical post-merger income statement that takes into account potential synergies, estimating the positive impact of increased market share as well as potential benefits from synergies.
Broaden your investigation to include information on the company’s industry: what is the sector’s growth potential? Your target should be well-situated in comparison with its peers and competitors.