This Case study is about Acquisition Analysis of Quantum Research Company that we did for a client based in the United States of America. Our client is a Public Listed company looking for expansion in various quantum computing technology-based products and services. For expansion, the Client wished to acquire smaller running yet up-for-sale businesses for instant growth into more diverse fields like Cloud computing, cybersecurity, quantum computing circuits and components. Along with research and development in Quantum computing technological advancements.
For Financial advice, the client hired our principal, Ms Sadaf Abbas, as acting Virtual CFO. We were providing them with a Financial Model, Business Plan and Pitch deck services along with, Financial advice in their decisions before going into mergers or acquisitions.
For this to be profitable, there was a need to conduct detailed Financial Analysis to verify whether or not the acquiring business deems fit. The client approached Oak Business Consultants to help them figure out whether the business they’re acquiring is suitable for acquisition serving the purpose of increasing shareholder’s wealth.
The objective of this project was to evaluate one of the prospective subsidiary acquisition. Here, a detailed analysis of the financial reports and future expected results after acquisition and room for improvements were to be assessed to quantify the viability of the business being acquired. More than that, Oak Business carried out an analysis of whether or not the prospective subsidiary fit the requirements of the Client.
The process of valuation required a thorough and detailed analysis of all the financial data provided by the prospective subsidiary. A lot of core items were missing or misstated that made the analysis a bit trickier. There were inconsistencies present throughout that made the analysis challenging from the start.
Oak Business Consultant carried out the following services for the client:
Oak Business Consultant went on to verify the calculations and valuation of the prospective subsidiary to testify whether they were done accurately or not.
The solutions provided by Oak Business Consultants result from the valuation of various aspects of the prospective subsidiary’s financial statements and projections. Bootstrapping the historical results to create future projections to see if the company could be turned over into a highly profitable business after the acquisition. And an unbiased evaluation of results of the organization to assess the worth of the company against the seller’s asking price to be presented to our client for better chances of negotiation and a profitable deal.
The first thing that we assessed is the income statement of the prospective subsidiary company. Here we mainly assessed one discrepancy in the sales area. This led to a significant difference in the EBITDA as well. Without showing the actual numbers due to non-disclosure agreements, we can explain the assessment and findings of the numbers.
The sales in 2019 turned out to have increased to more than 300% as compared to 2018. Along with this, the COGS and the OPEX also increased. However, when making a comparison to sales, the OPEX percentage was lower in 2019 compared to 2018 and 2017. While keeping this in view, there was barely any change in the EBITDA of 2017 and 2019. This led Oak Business consultants to investigate further if all the losses have been reported accurately by the company.
Another thing that Oak Business Consultants picked up on was the similarities in the EBITDA of 2017 and 2019. While the EBITDA remained the same, there was a clear change in the Net Profit percentage. This, however, was due to a change in the depreciation policy. But what led to this change? There weren’t any clear identifying markers to explain this difference.
The next thing and the more prominent issues that Oak Business Consultant assessed were in the balance sheet. A few issues arose when we were evaluating the business. The issues related to the bank, capital expenditure, and retained earnings mostly.
We observed a sharp increase in the bank portion of the balance sheet. There is no clear indication or reason for this in the statements. Even though the other statements showcase a cash outflow as opposed to a major inflow.
Next, there was an astounding discovery while analyzing that there was the capital expenditure in the year 2019. However, there was no clear identification in the fixed assets about whether there were more of those purchased. The number of additions and disposals were not clear because of the lack of data. What could be understood was that there was a lower percentage of fixed assets than before.
We assessed that the depreciation of the prospective subsidiary addition. Since there wasn’t enough data to assess this, we were not able to identify what kind of depreciation method they had in place. Moreover, this became more confusing because of the obvious change in the depreciation in the last year of 2019 of the prospective subsidiary.
There were significant issues when it came to the recording of the retained earnings. They were misrepresented and wrongly calculated in the financial statements. After a detailed analysis, we came to the conclusion that these were also wrongly recorded in the tax returns.
Oak Business Consultant intended to carry out an extensive cash flow statement analysis. However, the vagueness of the financing activities in the prospective subsidiary made it difficult for this to happen. Oak Business Consultant made sure to identify this aspect in the financial statements and clarify the need for more details in the calculations.
Finally, Oak Business Consultants was able to do the valuation of the business. We made sure to take two different approaches when it came to this. The first one was based on the average percentage of COGS to sales and the expected growth rate of sales.
The other method we used for the valuation of the business was through the business’s total assets and liabilities it presented. The assets-based evaluation came to be lower than the previous method, and it proves to be the minimal amount that our Client would have to pay for the acquisition.
Another aspect that we helped our client with was the future prediction of how much improvement could be possible after a change in the management and further help of the client’s expertise and resources available including the economies of scale.
Finally, Oak Business Consultants helped the Client to make a decision based on the details provided. Apart from the problems presented, other details in the financial statements of the prospective subsidiary showed no other issues or implications. The board of directors took the final acquisition decision using the information and assessment we provided them with.
As a result of the financial Acquisition Analysis of Quantum Research Company performed by Oak Business Consultant, the Client’s board of directors made a well-informed decision towards the acquisition of that subsidiary.
The outcome provided by Oak Business Consultant mainly revolved around the valuation of the company and how much client could offer to acquire the subsidiary. The resulting value was US$220,000 against the US$ 500,000 asking price. This was the minimal amount that would be suitable for our client to have a successful and profitable acquisition.
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