We're talking about one of the tools in your toolkit, the acquisition analysis. And remember it might be useful to think about this tool or framework as a sort of equation. And we've talked about the first element in that equation. We've been focusing on the strategic benefit. Now remember, an acquisition analysis is essentially a cost benefit analysis. So we focused a bit on the strategic benefit. What do we need to talk about next? The cost. And what's the biggest cost in an acquisition usually? The purchase price. So for this equation to work out positively, it seems sort of intuitively obvious that the strategic benefit needs to outweigh the purchase price. We need to get more benefit from the acquisition than we are paying for. Otherwise it doesn't make sense to proceed. Now, one of the challenges involved is really getting that purchase price right. Remember, often acquisitions fail, and one of the primary sources of failure is that the acquiring firm over pays for the target and it just ends up not being worth it. They don't recover all of those cost that were embedded in that purchase price. So, it's important to carefully consider that purchase price and what sorts of things we should think about. Well, we need to consider all the potential costs of success. In other words, what costs are we going to incur to really make this acquisition work, to put these two companies together, to integrate the business operations in the way that we're attempting? And as we're keeping an eye on those potential future costs, we need to essentially discount the purchase price accordingly, or at least we need to take into account all of those potential costs. So that we can get the purchase price right. Now, what's oftentimes a challenge is that these future costs, the costs of making the acquisition successful, are costs that the acquiring organization has to bear. But these are not costs that the target firm has to bear, if the deal doesn't go through. So let's consider an example. If we think about what is now the largest airline in the world. It was created when American Airlines purchased US Air. Now, one of the things when you're putting two big airlines together. If you're American Airlines you had to think about the cost of integrating the reservations systems, or integrating the frequent flyer programs. And so you have to sort of consider those things as you're arriving at what was a $14 billion purchase price for US Air. But remember, if you're US Air, you don't really have to worry about those integrative costs, because if the deal doesn't go through. Those are costs that you don't have to incur. So, this is what makes it really difficult oftentimes for an acquiring firm to not pay too much of a premium. Oftentimes, we have to pay at least somewhat, some premium amount. Otherwise, why would the target firm even sell? So we have to often offer a purchase price that adds up to more than just the independent evaluation of that target. But we have to be very careful that we don't offer so much of a premium that it's gonna sink us, because we're gonna have to incur all of these other future integrated costs of success as well. So, it's very important to really think carefully about this purchase price and it's worth noting what are some of the things we need to consider? First of all, one of the things we need to consider is are there other suitors? In other words, is there some sort of a bidding war that might ensue as we're trying to purchase this potential target. Are there other potential acquirers that are also interested? And sometimes if there are, what can happen is that can run up the potential purchase price and we can end up paying too much. Simply because we're in this bidding war with a competitor. So we have to be very careful of that. And then again, we have to really take into account, what will the cost of success be in this potential acquisition? And do we have an accurate and a realistic assessment of what those costs will be? And are we willing to incur those costs in addition to whatever purchase price we're offering for that target organization? In an acquisition analysis we need to first think about the strategic benefits, but those strategic benefits need to outweigh, or out strip the purchase price. And that needs to take into account all of these other costs associated with making the acquisition.
