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Expansion into Eastern Europe
Firstly, the team analyzed the macroeconomic development in the target country. Specific attention was given to the stage of development of the financial system and its underlying dynamics. It quickly became apparent that the market was relatively immature, with growth opportunities but also substantial risk factors. These included, critically, the sustainability of economic development and the timing of economic convergence with the more mature European markets.
Using comparisons with other developed and developing markets and extensive interviews with experts, the team then developed a forecast for the future development of the banking market. For certain products, we envisaged a development in line with experience in more mature markets; for other products however, we foresaw a more rapid transformation, leapfrogging certain stages in the usual life cycle.
While assessing the market, the team was also analyzing the target company. We supported the due diligence phase, conducting site visits and management interviews, and focusing primarily on the strategic aspects of the business.
On the basis of the market and company insights thus gained, we developed, jointly with the client’s management, a new business strategy for the target, including a quantification of the restructuring and synergy potential.
The value assessment
The high level of uncertainty about the future development of the economy in general and the banking system in particular required a specific approach to assessing the target’s value.
First, we developed a basic scenario, translating our expectations on general market development and company strategy into a financial plan.
Then, we developed alternative market scenarios (e.g., for recession or hyperinflation), as well as alternative company scenarios (e.g., weak performance relative to market) which enabled us to determine the maximum upside and downside potential.
We then combined the various scenarios to have a reasonable range of values and an “expected” value.
The DCF valuation was then complemented with a multiple analysis in order to relate the value creation potential to market prices.
The impact on the acquirer
After we had developed the investment case, we assessed its impact on our client’s financials, calculating the resulting potential accretion as well as the possible maximum risk.
Throughout the process, we were able to help our client gain a deeper understanding of the foreign market, by providing “hard facts”. Equally important, however, was our ability to raise the client’s confidence in this new environment, by, for example, organizing discussions with other foreign investors and macroeconomists.
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