Deciphering the M&A Case Study Framework: A Comprehensive Guide

Looking to master the art of M&A case study analysis? Look no further than our comprehensive guide! From understanding the key components of a successful framework to analyzing real-world case studies, this article has everything you need to become an expert in M&A strategy.

Posted May 11, 2023

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Mergers and acquisitions (M&A) are an essential aspect of the modern business world, where companies are looking for ways to expand their operations, increase their market share, and diversify their product offerings. M&A can take many forms, including mergers, acquisitions, joint ventures, and strategic alliances. This comprehensive guide aims to provide a detailed understanding of the M&A case study framework and the critical factors that influence the success of M&A transactions.

What is M&A and Why is it Important in Today's Business Landscape?

Mergers and acquisitions refer to the process of combining two or more companies or businesses. M&A is typically used as a growth strategy as it enables companies to expand their market share, reduce their costs, gain access to new technologies or products, and achieve economies of scale. M&A is also used as a way for companies to enter new markets, diversify their product offerings or strategic partnerships and collaborations.

M&A is a critical aspect of today's business landscape, as it enables companies to maximize value creation and improve their competitiveness in the global marketplace. Successful M&A transactions can lead to better financial performance, increased shareholder value, and enhanced market position.

However, M&A transactions can also be risky and complex, requiring careful planning, due diligence, and execution. Companies must consider various factors such as cultural differences, regulatory requirements, and potential legal issues that may arise during the process. Poorly executed M&A transactions can result in financial losses, damage to reputation, and even legal consequences.

Moreover, M&A activity is influenced by various external factors such as economic conditions, political instability, and technological advancements. For instance, the COVID-19 pandemic has significantly impacted M&A activity, with many companies delaying or canceling their transactions due to the uncertainty and economic downturn caused by the pandemic.

Understanding the Different Types of M&A Transactions

There are several different types of M&A transactions that companies can use as a growth strategy, such as horizontal, vertical, and conglomerate mergers and acquisitions.

Horizontal mergers involve the combination of two companies that operate in the same industry or market. Such mergers aim to increase market share, reduce competition, and achieve economies of scale.

Vertical mergers refer to the combination of two companies that operate in different levels of the value chain of the same industry. Vertical mergers aim to increase efficiency, reduce the cost of raw materials, and improve supply-chain management.

Conglomerate mergers involve the combination of two unrelated companies that operate in different industries or markets. Such mergers aim to diversify the product portfolio, reduce business risk, and achieve economies of scale.

Another type of M&A transaction is a reverse merger, which involves a private company acquiring a public company. This allows the private company to go public without having to go through the lengthy and expensive process of an initial public offering (IPO).

Finally, there are also friendly and hostile takeovers. A friendly takeover is when the target company agrees to be acquired by the acquiring company, while a hostile takeover is when the acquiring company makes an offer to the target company's shareholders without the approval of the target company's management.

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Identifying the Key Players in M&A Case Studies

There are several key players involved in M&A transactions, including the acquiring company, the target company, the board of directors, the shareholders, and the investment bankers and advisors. The acquiring company is the buyer of the target company, while the target company is the company that is being acquired. The board of directors plays a crucial role in the approval of the transaction, while shareholders have the power to vote and approve the deal. Investment bankers and advisors are usually responsible for facilitating the transaction and advising on the best strategy for the acquiring company.

It is important to note that the role of each key player can vary depending on the specific M&A case. For example, in a hostile takeover, the target company and its board of directors may resist the acquisition, while the acquiring company may need to work with its investment bankers and advisors to come up with a more aggressive strategy. Additionally, the shareholders may have different opinions on the deal, and it is important for the acquiring company to communicate effectively with them to gain their support. Understanding the unique dynamics of each M&A case is crucial for identifying the key players and their roles.

Analyzing the Financial Aspects of a M&A Deal

Financial analysis is a critical step in evaluating M&A transactions. Companies need to conduct a thorough financial analysis to determine the value of the target company and the potential benefits of the acquisition. The financial analysis should consider the financial statements of both the acquiring and target companies, including income statements, balance sheets, and cash flow statements. Additional financial metrics such as net present value (NPV) and internal rate of return (IRR) can also be used to evaluate the financial viability of the transaction.

Another important aspect of financial analysis in M&A deals is the consideration of potential risks and uncertainties. Companies need to assess the potential risks associated with the acquisition, such as changes in market conditions, regulatory changes, and integration challenges. This analysis can help companies develop strategies to mitigate these risks and ensure a successful acquisition.

Furthermore, financial analysis can also help companies identify potential synergies between the acquiring and target companies. Synergies can arise from cost savings, revenue growth, and increased market share. By identifying these synergies, companies can better evaluate the potential benefits of the acquisition and develop a plan to realize these synergies post-merger.

Examining the Legal and Regulatory Implications of M&A Transactions

Legal and regulatory due diligence is a necessary step for any M&A transaction. Companies need to ensure that they comply with legal and regulatory requirements and that their transaction does not violate any antitrust, anti-bribery, or data protection laws. Legal and regulatory due diligence can also include assessing licenses, patents, and intellectual property rights.

Additionally, legal and regulatory due diligence can also involve reviewing the target company's contracts, leases, and other legal agreements to identify any potential liabilities or risks. This can include analyzing the terms of employment contracts, supplier agreements, and customer contracts to ensure that they are favorable and do not pose any legal or financial risks to the acquiring company. It is important for companies to conduct thorough legal and regulatory due diligence to avoid any legal or financial consequences that may arise from a poorly executed M&A transaction.

Assessing the Strategic Motivations for M&A Deals

Companies engage in M&A transactions for various strategic reasons such as increasing market share, diversifying the product portfolio, gaining access to new technologies, reducing costs, or achieving economies of scale. It is essential to assess the strategic motivations behind the transaction to determine if the deal makes sense and will add value to the acquiring company.

One of the most common strategic motivations for M&A deals is to gain access to new markets. By acquiring a company that has a strong presence in a particular market, the acquiring company can quickly establish itself in that market and gain a competitive advantage. This can be particularly beneficial for companies that are looking to expand internationally.

Another strategic motivation for M&A deals is to acquire talent. In some cases, a company may be interested in acquiring another company primarily for its employees. This can be especially true in industries where there is a shortage of skilled workers. By acquiring a company with a talented workforce, the acquiring company can quickly build its own team and gain a competitive advantage.

Evaluating the Risks and Benefits of M&A Transactions for Businesses

M&A transactions are not without risks. These risks include the integration of different corporate cultures and management styles, the potential loss of key employees, legal and regulatory compliance issues, and financial risks. On the other hand, M&A transactions can offer significant benefits such as improved market position, greater economies of scale, access to new technologies, and increased shareholder value. It is essential to evaluate the risks and benefits of M&A transactions for businesses and to mitigate risks to ensure a successful transaction.

Developing a Successful M&A Strategy: Tips and Best Practices

Developing a successful M&A strategy requires careful planning and execution. A well-designed strategy can help companies achieve their financial and strategic goals. Some best practices for developing a successful M&A strategy include conducting thorough due diligence, setting clear objectives, identifying potential risks, and developing a post-merger integration plan.

Real-World Examples of Successful M&A Deals and Lessons Learned

There are many examples of successful M&A transactions, including Disney's acquisition of Marvel Entertainment, Procter & Gamble's acquisition of Gillette, and Facebook's acquisition of WhatsApp. By studying these examples, we can learn valuable lessons about the factors that contribute to successful M&A transactions, including proper due diligence, clear strategic objectives, and effective post-merger integration plans.

Common Pitfalls to Avoid When Engaging in a M&A Transaction

M&A transactions can be complex, and there are several common pitfalls that businesses should avoid. These pitfalls include overvaluing the target company, inadequate due diligence, poor communication with stakeholders, and underestimating integration challenges. Avoiding these common pitfalls can help ensure a successful M&A transaction.

The Role of Due Diligence in M&A Case Studies: A Step-by-Step Guide

Due diligence is a critical component of any M&A transaction. Due diligence involves conducting a comprehensive review of the target company to assess its financial, legal, and operational status. A step-by-step guide to due diligence includes analyzing financial statements, reviewing contract agreements, assessing intellectual property rights, and evaluating employee relations and management processes.

How to Measure the Success of Your M&A Deal: Key Performance Indicators to Track

Measuring the success of an M&A transaction is essential to determine if the deal has added value to the acquiring company. Key performance indicators (KPIs) can help companies assess the success of the transaction. These KPIs include financial performance metrics such as revenue growth and profitability, market share, employee satisfaction, and customer satisfaction.

The Future of M&A: Trends, Innovations, and Challenges

The future of M&A transactions is rapidly evolving, driven by technological advancements, changing market conditions, and global economic shifts. Developments such as big data, artificial intelligence, blockchain, and cloud computing are transforming the way companies approach M&A transactions. As the business landscape continues to evolve, businesses will need to embrace innovation and adapt to new challenges to succeed in today's competitive market.

The M&A case study framework is complex, but by understanding the key factors that contribute to a successful transaction, companies can execute M&A deals that create long-term value. The critical success factors for M&A transactions include a well-designed M&A strategy, due diligence, proper financial analysis, and effective post-merger integration planning. By following best practices and learning from real-world examples, businesses can achieve their strategic and financial goals through M&A transactions.

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The Big Idea: The New M&A Playbook

  • Clayton M. Christensen,
  • Richard Alton,
  • Curtis Rising,
  • Andrew Waldeck

Why you should pay top dollar for a “killer deal”—and other new rules for making acquisitions

Reprint: R1103B

Companies spend more than $2 trillion on acquisitions every year, yet the M&A failure rate is between 70% and 90%. Executives can dramatically increase their odds of success, the authors argue, if they understand how to select targets, how much to pay for them, and whether and how to integrate them.

The most common reasons for making an acquisition include holding on to a premium position or cutting costs. But to realize those benefits, the acquirer needs to achieve economies of scale by absorbing the target’s resources into its operations. CEOs, who are often unrealistic about the performance boost from such acquisitions, must be sure not to pay too much for them.

A less-familiar reason for making an acquisition is to fundamentally change a company’s growth trajectory. In those deals, the acquirer uses the target’s business model as a platform for growth. Because the business models with the most transformative potential are often disruptive, they can be difficult to evaluate, and CEOs often believe that such acquisitions are overpriced. In fact, however, those are the ones that can pay off spectacularly.

When a CEO wants to boost corporate performance or jump-start long-term growth, the thought of acquiring another company can be extraordinarily seductive. Indeed, companies spend more than $2 trillion on acquisitions every year. Yet study after study puts the failure rate of mergers and acquisitions somewhere between 70% and 90%. A lot of researchers have tried to explain those abysmal statistics, usually by analyzing the attributes of deals that worked and those that didn’t. What’s lacking, we believe, is a robust theory that identifies the causes of those successes and failures.

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  • Clayton M. Christensen was the Kim B. Clark Professor of Business Administration at Harvard Business School and a frequent contributor to Harvard Business Review.
  • RA Richard Alton is a senior researcher at the Forum for Growth and Innovation at Harvard Business School.
  • CR Curtis Rising is the managing director of Harvard Square Partners, a consulting practice focused on inorganic growth and leadership assessment, based in Cambridge, Massachusetts.
  • Andrew Waldeck is a senior partner at the growth strategy consulting firm Innosight , where he leads the firm’s healthcare practice.

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  • M&A and Merger Models Tutorials

Merger Model: Assessment Centre Case Study (24:14)

In this Merger Model tutorial, you’ll learn how to complete a merger model case study exercise given at an assessment center.

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Step 1: Read and interpret the instructions… and understand where to cut corners!

Requirements: Need to be able to change the purchase price and % debt and stock used… but cash and the foregone interest on cash are unnecessary, which simplifies things.

Also, they’ve given us incomplete information in a few spots and we need to go through and calculate some figures for Company A and Company B, such as the shares outstanding.

SKIP the formatting!

Step 2: Enter the financial information for Company A and Company B.

Fairly straightforward, but remember that we need to calculate a few additional numbers for this to work, such as the shares outstanding for each company and the Net Income and EPS, at least for the buyer.

Step 3: Calculate the “missing information” – Net Income, EPS, and Share Counts.

Start with Pre-Tax Income, then calculate Net Income based on the tax rates for both companies, and then EPS… not completely necessary for Company B, but definitely need it for Company A.

Then, calculate the Share Count for both companies and the Enterprise Value (just for reference).

Step 4: Go up to the top and enter the key assumptions, starting with Question #1.

To save time, skip the (1 + Premium) * Share Price * # Shares calculation and just calculate the purchase price based on the premium to Company B’s Market Cap instead — same result either way.

Calculate %s for debt and stock, then the amount of debt raised, debt interest rate, and shares issued.

Then, fill in the information about the synergies — no information on expenses here, so we leave it out.

Step 5: Combine the Income Statements for Company A and Company B.

Start with the Synergies, and then combine all the other line items, factoring in those synergies on top. Remember to factor in acquisition effects, such as additional interest expense.

Calculate down to EPS, making sure you include the NEW shares issued in the transaction and increase Company A’s share count as appropriate.

Step 6: Calculate Accretion / (Dilution) and the Pro-Forma Credit Stats.

Take the combined company’s EPS and divide by the buyer’s EPS and subtract 1.

For the credit stats, the two key ones are the Leverage Ratio (Net Debt / EBITDA here) and the Coverage Ratio (EBITDA / Interest) – so calculate those each year.

Step 7: Create sensitivities… if you have time.

Here, we would argue it’s pointless since it takes more time and effort to set them up, and they don’t save much time beyond the model we already have — so we’re skipping this step.

Step 8: What is the POINT of this case study exercise?

Takeaway #1: Even if we pay a higher premium for a seller, the deal might be MORE accretive depending on the purchase method… debt tends to be less expensive than stock.

Takeaway #2: Company B is a very cheap asset — MUCH lower P / E and EV / EBITDA multiples than Company A.

When a more expensive buyer acquires a much less expensive seller, the deal will almost always be accretive. Company B’s significantly higher tax rate also makes a difference — Company A gets “free money” after the acquisition since it’s only paying 25% in taxes rather than 40%.

Takeaway #3: Using debt tends to produce more accretion than stock, but it also produces higher leverage ratios and lower coverage ratios — so there is a trade-off between accretion / (dilution) and the credit stats following the deal.

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Mergers & acquisitions (m&a) modeling.

[Elective] Advanced financial modeling for mergers and acquisitions (M&A)

Course curriculum

Introduction to m&a modeling.

Course introduction

Course downloads - M&A model and reference files

Course objectives

Types of advanced financial models

Transaction details

Forms of consideration & synergies

Purchase price allocation and accretion/dilution

M&A case study overview

Interactive exercise 1

M&A Modeling Process

10-step M&A process

M&A templates and resources

Strategic versus financial buyers

M&A model conceptual representation

6-step M&A modeling process

Case study model layout and structure

Case study steps overview

Interactive exercise 2

Acquirer and Target Models

Structure of target and acquirer models

Financial statement mapping

Income statement mapping

Balance sheet mapping

Comparing acquirer and target statements

Creating the transaction stub period

Stub income statement

Stub balance sheet

Stub cash flow

Stub supporting schedules

Interactive exercise 3

Transaction Assumptions

Deal assumptions

M&A transaction inputs

Setting up scenarios

Purchase price

Sources and uses of cash

Shares issued and shares outstanding

Goodwill and purchase price allocation (PPA)

Interactive exercise 4

Closing Balance Sheet

Closing balance sheet introduction

Acquirer and target balance sheets

Fair value adjustments

Other adjustments

Consolidated pro forma balance sheet

Interactive exercise 5

Pro Forma Financial Model

Pro forma model overview

Merger integration revenue

Merger integration expenses

Combined income statement

Combined balance sheet

Changes in working capital

Depreciation schedule

Debt schedule

Target and acquirer debt

Interest schedule

Completing the cash flow statement

Pro forma DCF model setup

Pro forma DCF free cash flow

Pro forma DCF model NPV

Interactive exercise 6

Accretion & Dilution Analysis

Accretion dilution analysis

Earnings per share (EPS) impact

Cash flow per share (CFPS) impact

Testing scenarios

Interactive exercise 7

Sensitivity Analysis & Share Price Impact

Sensitivity analysis overview

Estimating change in intrinsic value per share

Impact on capital structure

M&A sensitivity data tables

Testing sensitivity analysis

Interactive exercise 8

M&A Modeling Conclusion

Download completed M&A model

Review of completed financial model

Qualified Assessment

Qualified assessment

Mergers & Acquisitions (M&A) course evaluation

S T R E E T OF W A L L S

Mergers & acquisitions (m&a) valuation.

In this Mergers & Acquisitions (M&A) Valuation module, we will describe the background for M&A banking that most investment bankers will need to know—particularly from the perspective of valuation. We will cover three key topics:

M&A Overview

Building an m&a model, accretion/dilution analysis.

There are a variety of ways to value a company. The valuation methods include:

Valuation Techniques Graphic

Each of these topics, including Acquisition Comparables , is very important in investment banking and is discussed in a previous module in this training course. In this module, we will concentrate on Merger Analysis, also known as Merger Consequences Analysis .

M&A Background

A merger is the combining (or “pooling”) of two businesses, while an acquisition is the purchase of the ownership of one business by another. Pooling of Interest Accounting , which is how mergers used to be accounted for, is no longer allowed by the Financial Accounting Standards Board (FASB) in the US , and was also disallowed by the International Accounting Standards Board (IASB) for international companies . As a result, M&A transactions must now be accounted for using the Acquisition Method of Accounting (a slightly revised version of the Purchase Method of Accounting ) . This all can be very confusing, because the word “Mergers” is frequently used to describe either type of combination of two business, but all combinations must now be treated as the purchase of one company by another (in other words, as “Acquisitions”).

Regardless, M&A banking involves analysis for scenarios in which one company (the Buyer ) proposes to offer cash or its own common stock in order to purchase the common stock of another company (the Seller or the Target ). M&A typically requires the target company’s Board of Directors and its shareholders’ approval (except in the case of a Hostile Takeover , in which one company acquires enough stock in another company to control it, against the wishes of the target’s management and/or shareholders).

Reasons for Pursuing M&A

M&A is a corporate strategy that may increase value for the acquirer by creating an important value driver known as Synergies (ways to increase profit/earnings through an acquisition), among other reasons. Synergies can arise from an M&A transaction for a variety of reasons:

  • Increase and diversify sources of revenue by the acquisition of new and complementary product and service offerings ( Revenue Synergies )
  • Increase production capacity through acquisition of workforce and facilities ( Operational Synergies )
  • Increase market share and economies of scale ( Revenue Synergies / Cost Synergies )
  • Reduction of financial risk and potentially lower borrowing costs ( Financial Synergies )
  • Increase operational efficiency and expertise ( Operational Synergies / Cost Synergies )
  • Increase Research & Development expertise and programs ( Operational Synergies / Cost Synergies )

The acquisition of another company may also be defensive in nature. For example, a large company may wish to acquire a small but growing company if the small company has a substantial competitive advantage over the large company, such as an important technology or patent, or superior product offering. This may protect the acquirer from serious competitive consequences, as the small company may over time be able to grow on its own and eat into the large company’s business.

Merger Analysis

Investment bankers put together merger models to analyze the financial profile of two combined companies. The primary goal of the investment banker is to figure out whether the buyer’s earnings per share (EPS) will increase or decrease as a result of the merger. An increase in expected EPS from a merger is called Accretion (and such an acquisition is called an Accretive Acquisition ), and a decrease in expected EPS from a merger is called Dilution (and such an acquisition is called a Dilutive Acquisition ).

A Merger Consequences Analysis consists of the following key valuation outputs:

  • Analysis of Accretion/Dilution and balance sheet impact based on pro forma acquisition results
  • Analysis of Synergies
  • Type of Consideration offered and how this will impact results (i.e., Cash vs. Stock)
  • Goodwill creation and other Balance Sheet adjustments
  • Transaction fees

These will all be encapsulated in the M&A Model , discussed in the next section. An investment banker begins to evaluate a potential M&A transaction by referring to a set of questions that will likely include the following:

  • Publicly traded stock, or privately held?
  • Insider ownership or sizable public float (i.e., is a large portion of the company’s shares available for sale in the open market)?
  • Strategic Buyer (an existing company able to gain from potential synergies)?
  • Financial Sponsor (a Private Equity firm looking to generate an attractive return via a Leveraged Buyout )?
  • Privately negotiated sale or auction?
  • Hostile or friendly takeover?
  • Acquisition currency (Cash or Equity)?
  • Historical premiums paid for Comparable Transactions ?

There are also various types of M&A transactions that can occur, both in terms of the dynamics of the transaction and the structuring of it. An M&A banker will need to know all the important distinctions among these types of transactions:

Types of Acquisitions Graphic

Remember that the M&A Consequences Analysis used by investment bankers is both an art and a science .

M&A Art vs. Science Graphic

The central piece of the analysis behind M&A advisory services offered by investment banks is the M&A Model. Any junior investment banker involved with a potential M&A transaction will spend many hours building and refining these models! The basic steps to building an M&A Model are as follows:

Merger Model Steps Graphic

The Pro Forma Company is the combined entity (the acquirer) after and assuming that the proposed transaction takes place . The differences in the financial attributes of this Pro Forma Company relative to the acquirer itself (before the transaction) will be a key part of the decision whether to go forward with the proposed transaction (for both the Buyer and Seller).

Determining the Purchase Price and Consideration

The Buyer in an M&A transaction intends to benefit from transaction by increasing the value available to its existing shareholders (otherwise, the shareholders are unlikely to approve it). By acquiring all of the shares of the Target company (or at least enough shares to gain control of it), the buyer is willing to pay a Control Premium . A Control Premium is the price paid above market value for a Target public company in order to gain control of the company. Here is a simple example of the control premium:

Company X offers to acquire Company Y for $50 per share. The current share price of Company Y prior to the announcement of the offer price is $40. Therefore, Company X offers a 25% premium over the current market price ($50 ÷ $40 – 1) to gain control of Company Y.

A critical component to evaluating an M&A transaction is to determine the Purchase Price for the Target company. In particular, how much of a Control Premium should be paid for the Target (relative to the current valuation of the target)?  One very important method is to look at recent Comparable (Precedent) Transactions to determine how much of a premium has been paid for ownership of other, similar companies in recent M&A transactions. Other methods used to establish a fair value for a target company in an M&A transaction include:

  • Comparable Company Analysis
  • Discounted Cash Flow Analysis

Typically, all of these valuation methods will be used to value the equity of the target company. These methods will hopefully lead to a reasonable, narrow range of Purchase Prices and Control Premiums for the Target; it will then be up to the management of both the Buyer and Target (along with their respective M&A investment banking advisors) to argue for and agree upon a precise price/premium.

An additional, important issue is the type of consideration being offered to the Seller’s shareholders. The Buyer can offer Cash, Equity (shares of the Buyer’s common stock) or a combination of both as the consideration for the Purchase Price. Which should the Buyer use? Typically, if the Buyer’s current stock price is considered undervalued relative to its peers, the Buyer may decide to not use Equity as consideration, because it would have to give the stockholders of the Target a relatively large number of shares to acquire the company. On the flip side, the Target shareholders may want to receive Equity consideration in this case, because they might feel it is more valuable than receiving Cash.

Conversely, if the Buyer feels that its current stock price is trading at high levels, the Buyer will likely want to use Equity for the consideration of the Purchase Price, because issuing new stock for the transaction is relatively inexpensive (i.e., the stock has a high value in dollar terms). The Target, meanwhile, might be hesitant to receive the Equity as consideration in this case; depending on the terms of the deal, the Seller’s shareholders may end up suffering a loss on the sale relative to Cash consideration in the event that the Buyer’s stock price falls between the time that the deal is announced and the time that the acquisition is completed (usually several months, but in some cases closing can take as long as a year).

As you can see, finding a combination of consideration that is agreeable to both the Buyer and the Seller is an important part of structuring the deal.

Transaction Assumptions

An important step in building an M&A Model is to make assumptions about important parameters affecting the deal, and as a vital step in determining a feasible range for the Purchase Price/Control Premium:

  • Current Share Price & Number of Shares Outstanding for the Buyer
  • Current valuation information for the Seller
  • Expected Purchase Price/Control Premium for the Seller in the proposed transaction
  • Portion of consideration arising from Equity/Cash
  • M&A transaction fees
  • Financing Fees from new Equity and/or Debt issuance
  • Expected interest rate on new Debt

Below is an example of a simple transaction assumptions tab from a M&A Model, in which a Purchase Price range is calculated, as well as an exact, proposed Purchase Price. This proposed Purchase Price will be used in the following sections for discussion.

Merger Model Assumptions Graphic

NOTE: The blue numbers are independent variables or an investment banker’s assumptions. The rest of the numbers are linked to numbers in the model or are calculated from them.

Building the “Sources & Uses” Table

The Sources & Uses section of an M&A Model contains the information regarding flow of funds in an M&A transaction—specifically, where the money is coming from and where it is going .

An investment banker determines the amount of money raised through various equity and debt instruments, as well as from Cash on Hand (i.e., existing Cash owned by the Buyer to help pay for the transaction) to fund the purchase of the Target. This represents the Sources of Funds . The Uses of Funds will show the cash that is going out to purchase the Target, as well as various fees needed to complete the transaction. Importantly, the total Sources of Funds must always balance with the total Uses of Funds .

Using the diagram from the previous section as an example, let’s start with the Sources of Funds side. Assume that Company X, the Buyer, will raise $30 million in New Senior Debt and $60 million in new Equity in order to raise money to purchase the Company Y, the Target company. This will trigger fees for the financing of this Debt and Equity, and these figures are located in the boxes on the left. On the Uses of Funds side, we see that the buyer will purchase the Equity of the target business, which is approximately $91.2 million. M&A transaction fees are 2.0% of the Purchase Price (i.e., the purchase of the Target’s Equity), or approximately $1.8 million. Financing fees include 4.0% of the $30 million in new Senior Debt raised and 6.0% of the $60 million in new Equity raised. These fees will total $1.2 million and $3.6 million, respectively.

Note that the total capital raised is only $90 million. The rest of the money used to pay for the transaction will have to come from Cash on Hand. To get the Sources of Funds to equal the Uses of Funds, we build the following “plug” formula for Cash on Hand:

Thus, approximately:

In this scenario Company X will need to use approximately $7.8 million of Cash from its own Balance Sheet to complete the transaction.

Calculating Goodwill

Goodwill is an asset that arises on an acquiring company’s Balance Sheet whenever it acquires a Target for a price that exceeds the Book Value of Net Tangible Assets (i.e., Total Tangible Assets – Total Liabilities) on the Target’s Balance Sheet. As part of the transaction, some portion of the acquired assets of the Target will often be “written up”—in other words, the value of the assets will be increased upon transaction close. This increase in asset valuation will appear as an increase in Other Intangible Assets on the Buyer’s balance sheet. This will trigger a Deferred Tax Liability, equal to the assumed Tax Rate times the write-up to Other Intangible Assets.

Without getting into too much additional technical detail, here is the formula used to determine the additional Goodwill created in an M&A transaction:

In this case we must add the Transaction Fees and Financing Fees to arrive at the Goodwill figure. Thus, approximately:

Note that in this transaction, Asset Write-Ups are ignored for the sake of simplicity. Here is a detailed technical explanation of Goodwill and other Transaction adjustments, including Asset Write-Ups and Deferred Tax Liabilities .

Note also that Goodwill is a Long-Term Asset but is never depreciated or amortized unless an Impairment is found—in other words, if it is determined that the value of the acquired entity clearly becomes lower than what the original Buyer paid for it. In that case, a portion of the Goodwill will be “written off” as a one-time expense—in other words, the Goodwill asset will be decreased by an amount equal to the amount of the Impairment charge. The write-down of Time Warner’s acquisition of AOL is an extreme, well-known example of such an Impairment charge.

Adjustments to the Pro Forma Balance Sheet

When Company X acquires Company Y, the Balance Sheet Items of Company Y will, for the most part, be added to those of Company X. There will be some adjustments to this, however, and these adjustments must be accounted for. We’ve already discussed one such adjustment: Goodwill. Besides Goodwill, there are additional adjustments that need to be made to the Buyer’s Balance Sheet to account for the transaction. Here is an example of all of the Balance Sheet adjustments that will occur using the adjustments made to the Pro Forma Balance Sheet that reflects the “Transactions Assumptions” illustration given above.

Merger Model Balance Sheet Adjustments Graphic

In the illustration above, the adjustments are as follows ($ in thousands):

  • Company X, the Buyer, issues $60 million and $30 million in capital. Net of the Equity and Debt financing fees, the Company receives $83,375 in Net Proceeds . Net Proceeds is a financing adjustment that is added to the historical Cash balance. Then the historical cash balance is adjusted for the transaction purchase price of $90,000 (net of the Cash Proceeds of $1,241 on Company Y’s Balance Sheet). Therefore, the cash balance is affected by the following calculation:
Pro Forma Cash & Equivalents = Company X and Company Y Current Cash & Equivalents of $2,072 and $1,241, respectively + $83,375 Financing Adjustment – $90,000 Transaction Adjustment
  • The Equity raise of $60,000 is added to the Additional Paid-in Capital and the Debt raise of $30,000 is added to Notes Payable.
  • Company Y Book Value is subtracted from the Accumulated Income/(Deficit), also known as Retained Earnings. In other words, the Book Value of Company Y’s Equity is zeroed out.
  • Finally, Goodwill is adjusted by the Goodwill amount of $66,373 created in the proposed transaction.

After the transaction has closed, the Buyer will own all of the assets, as well as the financial performance (Profit/Loss), of the Target company. Accretion/Dilution Analysis is used to determine how the Target’s financial performance will affect the Buyer’s Earnings Per Share. As we discussed earlier, a transaction is accretive if the buyer’s expected future EPS increases as a result of the acquisition. On the other hand, the transaction would be dilutive if the buyer’s expected future EPS declines as a result of the acquisition. Thus it is important to estimate the Accretion/Dilution potential from a deal before the Buyer can agree to the proposed transaction.

If the consideration used for the acquisition of the Target company is the Buyer’s common stock, the transaction will often be dilutive to the buyer’s EPS due to the fact that the new shares issued to buy the Target will increase the number of outstanding shares of the Buyer. If that is the case, a combination of Equity and Cash may be used to for the consideration of a Purchase Price to minimize the effect of dilution on EPS.

Additionally, an Accretion/Dilution Analysis will attempt to measure the impact of expected Synergies from the transaction (both in terms of increased revenue and decreased costs). Typically these Synergies are represented as a percentage increase/decrease in the Revenue/Costs for the Target’s financial performance, not that of the Buyer.

For example, here is a hypothetical accretion/dilution analysis in the event that Google (Ticker: GOOG) had acquired Salesforce.com (Ticker: CRM) in 2011:

Accretion/Dilution Analysis (Cash) Graphic

The above acquisition scenario assumes 100% consideration in Cash, and once estimates from Synergies are included, the acquisition is accretive to Google’s Earnings Per Share in 2011E and 2012E by $0.15 and $0.56, respectively. (Note that in this scenario Interest Expense increases, because Google would need to issue new Debt to pay Cash for the shares in CRM.)

Accretion/Dilution Analysis (Stock) Graphic

By contrast, the above acquisition scenario assumes 100% Equity consideration. As a result, 37.222 million new shares need to be offered to CRM to fund the Purchase Price; this is dilutive to Google’s Earnings Per Share in 2011E and 2012E by ($3.23) and ($3.26), respectively.

Note that if a Buyer with a relatively low Price/Earnings Ratio acquires a Target company with a relatively high Price/Earnings Ratio, the transaction will generally be dilutive to the Acquirer on a pro forma basis. This is because for each dollar of Price used to acquire the Target company, the Buyer is receiving fewer dollars of Earnings.

Additionally, if the Buyer has an Earnings Yield ([Earnings Per Share ÷ Share Price], or simply [1 ÷ Price/Earnings Ratio]) that is lower than the expected Cost of Debt (the interest rate on new Debt, after accounting for the tax shield from the Debt), then using Equity as consideration will be more accretive (less dilutive) than using Cash. This is because a lower Earnings Ratio necessarily implies a high Price/Earnings Ratio. As a result, the higher the Price/Earnings Ratio of a company, the more likely it is that that company will want to pursue an acquisition strategy, and the more likely it is that that company will want to use Equity as consideration for the deal (all other things being equal, of course).

M&A case interviews overview

A detailed look at m&a case interviews with a sample approach and example.

M&A motivations | Approaching M&A cases | M&A question bank | Example case walk-through #1 | Example case walk-through #2

Acquisitions are exciting and make for great headlines, but the decision to pursue one is serious business - and makes for a great case interview topic!

For example, consider mega deals like Salesforce acquiring Tableau for $15.7B or Kraft and Heinz merging at a combined valued of $45B. Mergers and acquisitions (often abbreviated as M&A) are some of the splashiest business decisions, often due to the large size of the deals and ability to quickly shake up market share.

Like profitability or market entry cases , M&A questions will often come up during a case interview, either as the primary topic or as a component of a broader case.

Typical motivations for M&A activity (Top)

Before jumping into case interviews, let's talk about why a company might pursue a merger or an acquisition in the first place. There are 3 main factors that drive M&A decisions: growth, competition, and synergies.

M&A for growth purposes

When determining a long-term growth strategy, companies have several options they tend to consider: build, buy, or partner. Amazon's growth into the grocery industry is a great example of a company implementing both build and buy strategies.

Amazon began by leveraging their existing capabilities to build their offering internally, adding food products to their platform and same-day food delivery. However, in 2017 they announced the acquisition of Whole Foods . By purchasing an existing player in the grocery space, they were able to acquire not only the Whole Foods brand, customer base, and retail footprint, but also the employees, supplier relationships, and industry know-how. The acquisition allowed them to grow at a quicker pace than they would have been able to otherwise.

M&A for competitive purposes

Competition can be another big driver behind M&A activity. Consider Uber and Didi's merger in 2016. Both companies were spending enormous amounts of money to gain market share (Uber's losses were estimated at ~$2B), but were still not achieving profitability. By coming to a merger agreement, Uber and Didi were able to end the destructive competition in China and move forward as partners with a shared interest in each other's success.

M&A for synergy gains

Other companies pursue mergers or acquisitions due to the complementary nature of combining two businesses. These complementary aspects are called synergies and might include things like the ability to cut out redundant overhead functions or the ability to cross-sell products to shared customers.

The value of potential synergies is typically estimated prior to doing a deal and would be one of the biggest points of discussion for the buyer. Note that the task of estimating the value of synergies is often more art than science, and many companies overvalue the expected synergies they'll get from a deal. This is just one of the reasons more than 70% of M&A deals fail .

The synergies that can be realized through a merger or acquisition will be different for any given pair of companies and will be one of the primary determining factors in a purchase price. For example, the synergies between a mass retailer buying a smaller clothing company will be much larger than if a restaurant were to buy that same clothing company. Common cost structures and revenue streams often result in greater synergies. For example, two similar businesses that merge will be able to streamline their finance, HR, and legal functions, resulting in a more efficient operation.

M&A framework (Top)

Mergers and acquisitions are not entered into by companies lightly. These are incredibly strategic decisions that are enormously expensive, from both a time and resource perspective, so any leadership team will want to do their due diligence and consider these decisions from multiple angles.

While each M&A scenario will have its own unique factors and considerations, there are some recurring topics you'll most likely want to dive into. We'll cover these in five steps below.

💡 Remember that every case is unique. While these steps can apply to many M&A cases, you should always propose a framework tailored to the specific case question presented!

Step 1: Unpack the motivations

Before recommending a merger or acquisition, the first step is to understand the deeper purpose behind this strategic decision. The motivation might be hinted at in your case prompt, or it might be apparent given general knowledge of a particular industry.

For example, if the question is "Snack Co. is looking to expand into Asia and wants to determine if an acquisition of Candy Co. would be successful", you can tell that the underlying motivation for acquisition is growth through geographic expansion. If the question is about an airline looking to buy another airline, the drivers are likely the competitive nature of the industry and potential synergies in the cost structure.

Once you understand what's driving the M&A desire, you'll know what lens to apply throughout the remainder of the case. You'll also be able to weave in your business acumen in your final recommendation.

Step 2: Evaluate the market

As with many case interviews, a well-rounded market analysis is typically a good place to start. In this scenario, the market we're evaluating is that of the target company. The goal here is to develop a broad understanding of the attractiveness of the market, as the client is essentially investing in this space through M&A activity. For this step, consider:

  • Size and forecasted growth of the market
  • Barriers to entry such as regulations
  • The competitive landscape
  • Supplier and buyer dynamics

This step should not be skipped, even in the case of a merger between two companies in the same market. It can't be assumed that the market is attractive just because the buyer is in it already. Rather, if the market evaluation proves unattractive, the buyer should not only avoid the deal, but also address their existing strategy internally.

Step 3: Assess the target company

If the market is deemed to be attractive, the next question is if the target is the optimal company to acquire or merge with in that market. The main points to address here are:

  • Is the target financially stable e.g. profitable with growing revenues?
  • Does it have a large market share or growing customer base?
  • Does it have a capable and experienced team?
  • Does it have other intangible assets such as a powerful brand or a valuable patent?

Step 4: Identify potential benefits and risks

Next, consider the pros and cons of doing the deal. Where might the buyer be able to realize synergies with the target? What are the biggest risks to doing the deal? What might derail the integration? For this part, consider these key questions:

  • Are there cost or revenue synergies between the two companies?
  • What are the primary risks to integrating the two companies?
  • Are there concerns around cultural fit (95% of executives say this is vital to a deal's success )?

Step 5: Present your recommendation

Finally, pull all of your findings together and share your final recommendation. Make sure to support your argument with data from the earlier steps and note what you would want to look at if you had more time.

💡 Shameless plug: Our consulting interview prep can help build your skills

M&A question bank (Top)

Below, you'll a see list of M&A case questions sourced from a top candidate - Ana Sousa , an ex-McKinsey Business Analyst currently pursuing her MBA at OSU.

Case A background :

Our client, NewPharma, is a major pharmaceutical company with USD 20 billion in annual revenue. Its corporate headquarters is located in Germany, with sales offices around the world. NewPharma has a long, successful record in researching, developing, and selling “small molecule” drugs. This class represents the majority of drugs today, such as aspirin. They would like to enter a new, fast-growing segment of biological drugs, which are made with large and more complex molecules, and can treat conditions not addressable by conventional drugs. The Research and Development (R&D) associated with biological molecules is completely different from small molecules. In order to acquire these capabilities, a pharma company can build them from scratch, partner with startups, or acquire them. Competition is already many years ahead of NewPharma, so they are looking to jumpstart their own program by acquiring BioAdvance, a leading biologicals startup headquartered in San Francisco. BioAdvance was founded 10 years ago by renowned scientists and now have 200 employees. It is publicly traded, and at current share price, they are worth around USD 2 billion.

Example interview question #1: You are asked to evaluate this potential acquisition and advise on the strategic fit for NewPharma. What would you consider when evaluating whether NewPharma should acquire BioAdvance?

Example interview question #2: let’s explore the setup with bioadvance after a potential acquisition. bioadvance’s existing drug pipeline is relatively limited, however, newpharma is more interested in leveraging bioadvance as a biological research “engine” that, when combined with newpharma’s current r&d assets, would produce a strong drug pipeline over the next 10 years. what are your hypotheses on major risks of integrating the r&d functions of both companies, example interview question #3: in the case of an acquisition, newpharma wants to consolidate all biologicals r&d into one center. there are two options to do so: combine them at newpharma’s headquarters in germany, or at bioadance’s headquarters in san francisco. currently, newpharma does not have any biological facilities or operations in germany, so new ones would need to be built. how would you think about this decision.

Case B background :

Total Energy Inc. (TEI) is a private, medium-sized company with a strong history of drilling and producing natural gas wells in Pennsylvania. They own an ample, and believe valuable, set of land assets where more wells could be drilled. The company is well capitalized but has seen profits decline for the last few years, with a projection of loss for the next year. One of the main drivers is the price of natural gas, which has dropped considerably, mainly because companies like TEI have perfected unconventional drilling techniques, leading to an oversupply of the North American market. Current prices are at a five year low. A larger competition has approached TEI’s leadership about acquiring them for an offer of USD 250 million.

Example interview question #1: TEI’s leadership would like your help in evaluating this offer, as well as identifying alternative strategies. How would you assess this matter?

Example interview question #2: the exploration team at tei has found that there is an oil field in texas that they could acquire, and immediately start drilling. drilling is one of the core competencies and strengths of tei. how would you think about this option in comparison to the selling offer.

Case C background :

Tech Cloud has developed a new research engine designed to increase online retail sales by reshaping customer search results based on real-time customer data analysis. An initial assessment indicates outstanding results in increasing sales, and therefore a tremendous potential for this product. However, Tech Cloud is a small startup, so they do not currently possess the capabilities to sell and install their algorithm in large scale. A major tech company has approached Tech Cloud with a partnership offer: to help them make the new product scalable, offering to pay $150M for it as is, and asking for 50% of profits on all future sales of the new research engine.

Example interview question #1: How would you assess whether Tech Cloud should or should not take this partnership offer?

Example interview question #2: what risks would you outline in this partnership, and how would you recommend tech cloud to mitigate them.

Case D background :

Snack Hack is the fifth largest fast-food chain in the world in number of stores in operation. As most competitors, Snack Hack sells fast-food combo meals for any time of the day. Although Snack Hack owns some of its store, it is mainly operating under a franchising business model, with 85% of its operating stores owned by franchisees. As part of a growth strategy, Snack Hack has been analyzing Creamy Dream as a potential acquisition target. Creamy Dream is a growing ice cream franchise with a global presence. While they also operate by franchising, there is a difference: Snack Hack franchises restaurants (stores), while Creamy Dream franchises areas or regions in which the franchisee is required to open a certain number of stores.

Example interview question #1: What would you explore in order to determine whether Snack Hack should acquire Creamy Dream?

Example interview question #2: what potential synergies can exist between snack hack and creamy dream, example interview question #3: one of the potential synergies that our team believes has great potential is increasing overall profitability by selling creamy dream ice cream at snack hack stores. how would you evaluate the impact of this synergy in profitability, example m&a case #1 (top).

We'll now use our framework to tackle one of the example questions we listed above. Let's focus on Case A and answer the following question:

You are asked to evaluate this potential acquisition and advise on the strategic fit for NewPharma. What would you consider when evaluating whether NewPharma should acquire BioAdvance?

Unpacking: why do they want to acquire.

Following our recommended framework, the first step is to identify the underlying purposes of the acquisition. In this case, you can tell from the context information that their strategic motivation is to enter a new type of drug market. The case has already stated your alternatives outside of this M&A: to build capabilities from scratch or make a partnership/acquisition of a different target.

Evaluating the market: is it an attractive space?

Step 2 in our framework is to evaluate the market. You are told the biological segment is fast-growing, and does not overlap with NewPharma current products, therefore there is no risk of cannibalization. You still need to know who currently competes in this segment, what is the general profitability of these drugs and how it compares to small molecule drugs, and deep dive on the regulation for these drugs, since pharma industry is strongly regulation-driven.

Assessing the target: is it a good company?

Next, we jump into step 3, which is assessing the target. This is where we were given the smallest amount of information, so there is much to cover. R&D is a time-consuming process, and NewPharma will not see profits for drugs they start developing together in case of an acquisition in many years, maybe decades. Therefore, the first thing to look at is the value of BioAdvance’s current drug pipeline, or, in other words, what drugs are they currently developing, their likelihood of success, and their expected revenues and profits.

Another key factor is their capabilities, which is what NewPharma is mostly interested in. What does BioAdvance bring to the table in terms of scientific talent, intellectual property, and research facilities? We also want to look at whether they have current contracts or partnerships with other competitors.

Furthermore, besides their main capability which is research, NewPharma should also learn about their marketing and sales capabilities, to identify any synergies in global sales, and also to understand how they currently promote biologicals, since NewPharma has no experience in this. A great structure would also consider any gaps BioAdvance might have, both in R&D and marketing capabilities. Lastly, NewPharma needs to conduct a due diligence to assess the value of BioAdvance, and therefore the acquisition price.

Identify risks and benefits

Step 4 is identifying the risks and benefits. In a high level, the risks include potential of them having a weak pipeline, which would mean not seeing any profits for years. In addition, NewPharma is a European country, while BioAdvance is from California, which means there is a risk of cultural barriers between both their leaderships and their R&D scientists. In addition, there is the risk that entering this new drug market is not aligned with NewPharma’s strategy or core competencies. The benefits include quickly adding R&D capabilities to catch up with their competitors and addressing a new segment of customers that they currently do not serve.

Example M&A case #2 (Top)

Let's walk through another example M&A case to illustrate how the framework we've introduced might be applied in practice. We'll lay out the thought process a candidate would be expected to demonstrate in a case interview. Here's our prompt:

"Our client, Edu Co., is a publishing company that has historically focused on K-12 curriculum and printed educational materials. They're looking at acquiring a startup that's developed digital classroom materials and assessments. How should they evaluate this opportunity?"

Our first step is to consider why Edu Co. is pursuing an acquisition. From the prompt, we can see that they're an established business looking to acquire a newer entry to the market. Edu Co. has focused on their core capabilities - content and printing - but has not invested in a digital product.

Edu Co. is clearly eyeing the startup target as a way to accelerate their growth into the edtech space. Rather than investing in building a digital product themselves, Edu Co. is looking to buy a company that already has a strong product, customer base, and team.

To begin, we would want to evaluate the digital education market. We might ask for more information on the size and growth rate to start. If we find out the market is large and forecasted to grow at 10% per year, that tells us it's a fairly attractive market.

In terms of barriers to entry, there is limited regulation around K-12 content and assessment. In the edtech space, the main concern is around the secure storage of information having to do with minors.

The competitive landscape is something we would want to ask for more information about. We would want to know how many other companies were pursuing these products and which had the most market share. If the market is highly fragmented, it means there is still room for a clear winner to emerge.

Regarding customer dynamics, we would want to know about any indications of changing preferences. For example, the push towards remote learning during COVID-19 would be relevant, as teachers and students have quickly become more comfortable with digital products.

Once we've determined that the market for digital education is attractive, we'll want to turn our attention to the target company. We would start by asking the interviewer for any information on the company's finances, team, market share, and other assets.

Assume the interviewer gives us revenue, profit, and market share data for the past 3 years. As part of our due diligence, we would want to ensure that all three of these metrics were either stable or growing. If we saw dips in this data, it would be important to dive deeper and understand why their performance had declined.

We would also want to know what their organizational structure looked like. If their staff was primarily sales & marketing (meaning they had outsourced their engineering work), they would be a less attractive target, as acquiring the tech personnel was one of the big reasons Edu Co. was looking to buy the business.

Finally, we would want to understand the technology they had developed. It would be important to understand the strengths and weaknesses of their product as well as any patents or IP.

Next, we would want to lay out any risks or benefits to acquiring the company.

The biggest risk we see is that the two company cultures are very different - Edu Co. is large, slower to make changes, and has an older workforce, whereas the other is much smaller, more agile, and younger. If we tried to integrate these two companies, there may be friction between the two working styles.

On the benefits side, there is potential for both cost and revenue synergies. On the cost side, we would be able to cut redundant administrative roles out, such as HR and finance. On the revenue side, Edu Co. may be able to leverage their customer relationships to cross sell digital products.

Present your final recommendation

Eventually, the interviewer would ask if Edu Co. should pursue the acquisition. Here, we would want to pull all the findings together and lay out our reasoning. Start with the answer first:

Recommendation: "Edu Co. should acquire the edtech startup. It's an attractive market that's growing rapidly and doesn't have a clear leader yet. Furthermore the startup appears to be well-positioned in the market: their revenues, profits, and market share have been growing. As Edu Co. looks to grow into the digital education space, this acquisition will give them a leg-up on competitors. Edu Co. will also be able to leverage their customer relationships to rapidly expand the use of this new digital product. However, Edu Co. will want to develop a robust integration plan to mitigate the risk of culture clash. They may want to consider letting the startup remain in their existing HQ to retain their agile working style."

Summary: putting it all together (Top)

As discussed, M&A cases are fairly common because they have the potential to cover a lot of ground, relevant business challenges.

Realize that in a real M&A case, the due diligence on the target alone could take weeks. It's likely your interviewer will have you dive deeper into one specific step to observe your thought process. In that case, stick with your structure, follow their lead, and always lay out the next steps you would follow if you had more time.

Finally, keep in mind that M&A doesn't just come up because it's fun to analyze; it's also an important source of revenue for the firms - Bain's private equity group does hundreds of due diligence cases annually and BCG's post-merger intergration (PMI) practice makes good money helping firms execute a merger successfully.

Read this next:

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See all RocketBlocks posts .

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Mergers and Acquisitions Guide (M&A)

Guide to Understanding Mergers and Acquisitions (M&A)

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What is M&A?

Mergers and Acquisitions (M&A) is an umbrella term that refers to the combination of two businesses.

M&A provides buyers looking to achieve strategic goals via inorganic growth strategies as an alternative to organic growth, while giving sellers the opportunity to cash out or share in the risk and reward of a newly formed business.

Mergers and Acquisitions Guide (M&A)

What are Mergers and Acquisitions?

The goal of our M&A guide is to take a step back from complicated number crunching and shed light on how deals are negotiated, structured and consummated in the real world.

Using Microsoft’s acquisition of LinkedIn as our primary case study (and a few others along the way), we will break down the various parts of an M&A deal.

Along the way, look for “Deep Dive” links that point to more specific details of the M&A process.

We hope this proves to be a valuable resource that quickly gives you a real-world understanding of mergers and acquisitions, without the need to comb through voluminous textbooks.

Why Participate in M&A? (Reward vs. Risk)

When M&A is successful, it promises enhanced value to both the buyer and seller. For the buyer, M&A offers the following benefits.

  • Accelerate time to market with new products and channels
  • Remove competition (buying a competitor is called horizontal integration)
  • Achieve supply chain efficiencies (buying a supplier or customer is called vertical integration)

Meanwhile, the cost savings that could be achieved by the reduction of redundant jobs and infrastructure (called synergies ) can be shared by both the buyer and seller: The anticipation of lower costs will allow the buyer to afford a higher purchase price.

When M&A is unsuccessful, it can destroy value and especially hurt the buyer (since the seller is already cashed out). Poor due diligence, mismanaged integration, and overestimation of potential cost savings are common reasons why mergers and acquisitions can fail.

Learn More →   Investment Banking Primer

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What is an Example of M&A? – Microsoft Acquires LinkedIn

Barring leaks to the media, the first time the world hears about a merger is usually through a merger announcement press release issued jointly by both companies. This is how we learned of the LinkedIn acquisition on June 13, 2016

Microsoft Corp. (Nasdaq: MSFT) and LinkedIn Corporation (NYSE: LNKD) on Monday announced they have entered into a definitive agreement under which Microsoft will acquire LinkedIn for $196 per share in an all-cash transaction valued at $26.2 billion, inclusive of LinkedIn’s net cash.  Full Press Release

M&A Form of Consideration (Cash vs Stock)

So LinkedIn shareholders will cash out. In this deal, each shareholder gets $196 in cold hard cash. However, buyers can also pay with their own stock, cash, or a mixture.

Learn all about how issuing acquirer stock vs cash impacts deals

Calculating the Purchase Premium in M&A

To see the percent control premium the $196 offer price per share represents, we need to look at LinkedIn’s share price prior to the announcement. Below, we can see how LNKD shares traded in the days leading up to the sale, as well as the huge spike in volume and share price on the announcement date:

m&a model case study

Source: Investing.com. (On the job, you’d use a fee-based financial data service for historical prices).

The premium was 49.5%: Shares closed at $131.08 per share the Friday before the Monday announcement. The $196 represents a 49.5% purchase premium . Acquirers always have to pay more than the seller’s trading price. Otherwise, why would the seller agree?

m&a model case study

How did this purchase premium compare to other deals? According to Bloomberg , most (83%) of global M&A deals in 2016 had premiums between 10-50%, putting LinkedIn in the high end. As we’ll see, a bidding war benefited the lucky shareholders at LinkedIn (and Microsoft’s $196 price wasn’t even the highest offer!).

M&A Deal Structure

Returning back to the press release:

LinkedIn will retain its distinct brand, culture and independence. Jeff Weiner will remain CEO of LinkedIn, reporting to Satya Nadella, CEO of Microsoft. Reid Hoffman, chairman of the board, co-founder and controlling shareholder of LinkedIn, and Weiner both fully support this transaction. The transaction is expected to close this calendar year.

It looks like LinkedIn’s CEO Jeff Weiner will stay on. Here are the two CEOs talking about the strategic rationale:

As is usually the case in a friendly deal (a deal in which the buyer and seller management teams jointly announce the deal, as opposed to a hostile takeover in which the buyer doesn’t have the support of seller management), you’ll get some language in the announcement like this:

The Board of Directors of the Company (LinkedIn) unanimously determined that the transactions contemplated by the Merger Agreement, including the Merger, are in the best interests of the Company and its stockholders, and approved the Merger Agreement and the transactions contemplated thereby, and unanimously resolved to recommend that the Company’s stockholders vote in favor of adoption of the Merger Agreement.

Interpretation: LinkedIn’s board of directors approved the deal and recommended that all the shareholders vote in favor of it.

How Does the Shareholder Approval Process Work?

Target shareholder approval is required.

For a decision as significant as a sale of an entire company, it isn’t enough for management and board to simply approve the deal.

The proposed transaction can only go through if more than 50% of a company’s shareholders vote to approve it. Or, in some rare cases, a supermajority is required.

In LinkedIn’s case, co-founder and chairman Reid Hoffman owned more than 50% of the shares. As we will see shortly, he committed to voting for the deal ahead of the announcement, so the vote was a foregone conclusion. That’s not always the case. In hostile takeovers or proxy fights,  there’s risk that shareholders will not vote to support a transaction.

Is Buyer Shareholder Approval Required?

For transactions in which the acquirer issues more than 20% of its own stock , acquirer shareholders may also be required to approve the acquisition. This is the case in the CVS/AETNA deal. Per CVS’ announcement press release:

The transaction is expected to close in the second half of 2018. It is subject to approval by CVS Health and Aetna shareholders, regulatory approvals and other customary closing conditions.

Merger vs. Tender Offer

The type of deal described in the Microsoft-LinkedIn press release is a traditional merger and represents the most common deal structure: The target’s management negotiates with the buyer’s management and board. They agree to terms, a merger agreement is signed and the deal is announced.

A less common way to structure a deal is via a tender offer . Tender offers are most common in hostile transactions and involve a buyer bypassing target’s management and board and going directly to the target’s shareholders with an offer.

Learn about tender offers vs mergers

Asset Sale vs. Stock Sale

In the Microsoft-LinkedIn deal, Microsoft used its cash to acquire LinkedIn stock. We know this because the press release, merger agreement and proxy all describe how Microsoft is buying LinkedIn shares. The proxy lays out clearly that at closing, LinkedIn shareholders will receive $196 for each of their shares, which will then be cancelled:

At the effective time of the merger, each outstanding share of Class A and Class B common stock (collectively referred to as “common stock”) (other than shares held by (1) LinkedIn as treasury stock; (2) Microsoft, Merger Sub or their respective subsidiaries; and (3) LinkedIn stockholders who have properly and validly exercised and perfected their appraisal rights under Delaware law with respect to such shares) will be cancelled and automatically converted into the right to receive the per share merger consideration (which is $196.00 per share, without interest thereon and subject to applicable withholding taxes).

However, there is another way Microsoft could have acquired LinkedIn: It could have acquired all LinkedIn’s assets and assumed all liabilities . The decision to structure a deal as an acquisition of the target’s assets vs an acquisition of target stock carries significant accounting, legal and tax issues. To learn more about the differences between these approaches, click on the “deep dive” link below.

What are the Key M&A Documents and Filings?

Up to now, we’ve been learning about the Microsoft LinkedIn deal solely from the detail provided in the announcement day press release. To understand a transaction beyond the headlines, we’ll need to locate additional deal documents that the companies have provided.

We’ve included a guide about the contents of key M&A documents here , but let’s summarize the key points below.

In a traditional merger where the target is public (which is the case here), we rely on two documents:

  • The definitive agreement (merger agreement)
  • The merger proxy

Definitive Agreement (Merger Agreement)

The press release announcing the deal is usually distributed to media outlets and is on both companies’ websites. When a public company is acquired, it will immediately file to the SEC an 8-K  that contains the press release. In addition, it will typically file the full merger agreement  (usually found as an exhibit in the same 8-K that contained the announcement press release).

In practice

The merger agreement is usually filed as an exhibit to the announcement press release 8-K or sometimes as a separate 8-K. Just search EDGAR for filings made on or around the announcement date.

Merger Proxy

Because LinkedIn must get shareholder approval for this transaction, it must file a proxy statement with the SEC. When the vote concerns a merger, the proxy is called a merger proxy and is filed as a DEFM14A. If the proceeds include stock, the proxy is called a  merger prospectus .

Both the merger agreement and proxy lay out in more detail the terms described in the press release. Specifically, the Microsoft-LinkedIn merger agreement details:

  • What conditions trigger the break-up fee ?
  • Can the seller solicit other bids ( go-shop” or no-shop )?
  • What conditions allow the buyer to walk away ( material adverse effects )?
  • How many shares will be converted to acquirer shares ( when buyers pay with stock )?
  • What happens to the options and restricted stock holders of LinkedIn?

In addition, the proxy will disclose many details around deal negotiations, company projections, treatment of dilutive securities, and other details that are more thorough and clearly laid out than those in the legal jargon-heavy merger agreement.

In Practice: Merger Proxy vs. Merger Agreement

The merger proxy (or merger prospectus) is much easier to navigate than the merger agreement, and is the primary data source used to understand key terms in the transactions.

Gap Period Between Announcement Date and Close

The period between deal announcement (i.e. when the merger agreement is signed) and deal completion (i.e. when the two companies legally merge) can last anywhere from a few weeks to several months. There are several common deal terms negotiated between buyer and seller that specifically address what should happen in case of unforeseen circumstances during this period.

Perhaps the most well-known deal term that addresses risk during this “gap period” is the  breakup fee  the buyer will get if the seller backs out of the deal. In addition to the breakup fee there are several, often highly negotiated deal terms that M&A professionals can utilize in the deal process.

Breakup Fee

The Microsoft-LinkedIn press release outlines a $725 million breakup fee should LinkedIn back out of the deal for the following reasons:

Upon termination of the Merger Agreement under specified circumstances, the Company will be required to pay Parent a termination fee of $725 million. Specifically, if the Merger Agreement is terminated by (1) Parent if the Company’s Board of Directors withdraws its recommendation of the Merger; (2) Parent or the Company in connection with the Company accepting a superior proposal; or (3) Parent or the Company if the Company fails to obtain the necessary approval from the Company’s stockholders, then the termination fee will be payable by the Company to Parent upon termination. The termination fee will also be payable in certain circumstances if the Merger Agreement is terminated and prior to such termination (but after the date of the Merger Agreement) an acquisition proposal is publicly announced or otherwise received by the Company and the Company consummates, or enters into a definitive agreement providing for, an acquisition transaction within one year of the termination.

In plain English, LinkedIn will pay Microsoft $725 million if:

  • LinkedIn’s board of directors change their minds
  • More than 50% of LinkedIn’s shareholders don’t approve the deal
  • LinkedIn chooses a competing bidder (called an “interloper”)

There’s good reason for buyers to insist on a breakup fee: The target board is legally obligated to maximize value for their shareholders. That’s part of their fiduciary obligation. That means if a better offer comes along (after a deal is announced but before it’s completed), the board may be inclined to reverse its recommendation and support the new higher bid.

The breakup fee seeks to neutralize this and protect the buyer for the time, resources and cost already poured into the process.

Notice that buyer protection via a breakup fee is one-directional: No breakup fee was owed to LinkedIn should Microsoft walk away.

However, that doesn’t mean Microsoft can just walk away unscathed. At deal announcement, the buyer and seller have both signed the merger agreement — a binding contract for the buyer. If the buyer walks away, the seller will sue.

Learn more about the breakup fee

Reverse Termination Fee

A seller also faces the risk of being left at the altar by the buyer, most notably the risk that the buyer will not secure the financing required to get the deal done. As the name suggests, a reverse termination fee  allows the seller to collect a fee should the buyer walk away from a deal .

To address this, the merger agreement (which we’ll review shortly) might identify conditions that would lead to the seller collecting a reverse termination fee. There was no reverse termination fee in the Microsoft-LinkedIn deal. (This is more of an issue when the buyer is a private equity  investor.)

Learn more about reverse termination fees

No-Shop Provisions

Recall how the press release disclosed that a breakup fee would take effect if LinkedIn ultimately consummates a deal with another buyer. The merger agreement has a section called “No Solicitation,” commonly known as a no-shop , that prohibits LinkedIn from seeking other bids. Microsoft, like most acquirers, was weary of other suitors (particularly of Salesforce) and sought to protect itself. Ultimately the no-shop held, but as we shall see later, it did not prevent Salesforce from entering a higher unsolicited proposal bid for LinkedIn after the deal, which forced Microsoft to up the ante.

While most deals contain a no-shop, a small-but-growing number of deals contain a go-shop. The go-shop explicitly allows the seller to explore competing bids after the merger agreement. This is most common in go-private transactions, in which the seller is a public company and the buyer is a private equity firm (as is the case in a traditional LBO ).

Learn more about no-shops and go-shops

Material Adverse Change (MAC)

Another protection for the buyer is  material adverse change (MAC) ,  which gives   the buyer recourse should the seller’s business go completely off the rails prior to the deal closing. Microsoft included a MAC (as do virtually all buyers) in the merger agreement. The MAC gives the buyer the right to terminate the agreement if the target experiences a material adverse change to the business.

Learn more about material adverse change

Exchange Ratios: Fixed vs. Floating Exchange Ratio

While Microsoft paid for LinkedIn in cash, remember that sometimes companies will use their own stock as currency. When a buyer pays for a target with its own stock, there’s another consideration: What if the acquirer’s share price drops between the announcement and closing date?

To address this, deals are usually structured with a fixed exchange ratio,  with the ratio fixed until the closing date. Alternatively, deals can be structured with a  floating exchange ratio . Here, the ratio floats so that the target receives a fixed value no matter what happens to either acquirer or target shares.

Purchase Price Working Capital Adjustments

The amount of working capital that a seller has on the balance sheet at the announcement date may be materially different from the amount it has at closing. To protect itself from deterioration of the company’s working capital position, buyers may structure an adjustment for working capital into the transaction that reflects changes between announcement and closing. For example, if at announcement a seller had net working capital of $5 million but only $4 million at closing, the purchase price would be adjusted down by $1 million. (There was no working capital purchase price adjustment in the Linkedin Microsoft deal.)

Working capital price adjustments are exceedingly rare in public deals. However, they are a common feature in private transactions.

A real life example

When Lifecare Hospitals acquired several of Healthsouth’s hospitals ( read more here ), it included a working capital purchase price adjustment. Per their  merger agreement :

The purchase price to be paid by Buyers … for the sale and purchase of the Purchased Assets as herein contemplated (the “Purchase Price”) shall be an amount equal to (i) $108,974,481, plus (or minus), (ii) an amount equal to the difference between the Final Net Working Capital and a deficit of $954,698.71, minus (iii) the Indebtedness Adjustment Amount. The adjustments described in clauses (ii) and (iii) above collectively are referred to as the “Purchase Price Adjustments.”

Contingent Consideration and Earn-Outs in M&A

As you might guess, the most significant hurdle in M&A negotiation is an agreement on price. One way to bridge the valuation gap between what a target thinks it’s worth and what a buyer is willing to pay is to structure contingent consideration (called an “earn-out”) .

When an earn-out is negotiated, the buyer explicitly spells out milestones that would trigger additional consideration. Commonly, an earn-out payment will be contingent upon the target hitting EBITDA and revenue goals, or specific milestones, such as a pharma target securing FDA approval of a drug.

Learn more about earn-outs

How to Treat Dilutive Securities in M&A?

In a transaction, several things can happen to stock options and restricted stock. The merger proxy clearly lays out how options and restricted stock holders will be affected.

Treatment of Unvested Options and Stock Based Awards

The LinkedIn merger proxy lays out what happens to these securities — namely, unvested LinkedIn securities will convert to unvested Microsoft securities with the same terms:

… At the effective time of the merger, each company option and company stock-based award that is outstanding immediately prior to the effective time of the merger that is unvested will be assumed or substituted for by Microsoft and automatically converted into a corresponding equity award representing the right to acquire, on the same material terms and conditions, an adjusted number of shares of Microsoft common stock, subject to certain exceptions.

The merger agreement also specifies the conversion mechanism. Because Microsoft traded at around $60 per share and LinkedIn shares were worth $196 around the time of the acquisition, an unvested LinkedIn option would convert to ~3.3x MSFT options ($196/$60). (The $60 is an approximation. As the merger proxy explains, the exact denominator will be determined as the volume weight 5-day average of MSFT stock prior to closing.) Converted options will also get a new exercise price – namely 3.3x the LNKD option exercise price:

The number of shares of Microsoft common stock subject to the new equity awards will be determined by a stock award exchange ratio based on the relative value of the per share merger consideration ($196.00) and the volume weighted average price per share of Microsoft common stock for the five consecutive trading days ending with the complete trading day ending immediately prior to the closing date of the merger, with a corresponding adjustment to be made to the exercise prices of company options.

Treatment of Vested Options and Stock Based Awards

In this deal, all vested in-the-money options and all restricted stock is cashed out:

Any outstanding company options or company stock-based awards that are vested, will become vested in connection with the merger, or that are designated by Microsoft as cancelled awards instead will be cancelled and converted into the right to receive an amount in cash (less any amounts required to be deducted or withheld by law) determined by multiplying $196.00 by the number of outstanding shares of LinkedIn common stock subject to the award (and in the case of company options, less applicable exercise prices).

In the case of vested options that are out of the money, the option holder gets nothing at all:

If the per share exercise price of any surrendered company option is equal to or greater than $196.00, such surrendered company option will be cancelled as of the effective time of the merger for no payment and will have no further effect.

Accelerated Vesting for Executives

Unlike other LinkedIn employees who hold unvested options and restricted stock (their unvested securities will simply convert to unvested MSFT securities as detailed above), LNKD executives benefit from accelerated vesting. Specifically, executives will get accelerated vesting (50% or 100% based on their agreements) should they be terminated.

Also, each executive officer is eligible to receive immediate vesting of 100% or 50%, as applicable, of his or her outstanding company options or company stock-based awards under his or her offer letter (or change of control agreement) if, within 12 months following the merger, there is an involuntary termination of employment without cause, or a constructive termination as defined in the applicable offer letter (or change of control agreement). This is covered more fully below.

Key Target Shareholders

The merger proxy includes a list of all the entities and individuals that hold significant amounts of target shares.

m&a model case study

Source: LinkedIn Merger Proxy

Notice that LinkedIn has dual class shares (Class A and B) — a feature you’ll see when insiders want to raise capital in an IPO  while retaining voting control (for moments like this). This enabled LinkedIn co-founder and chairman Reid Hoffman (and other insiders) to retain voting control post-LinkedIn IPO. Google, Facebook, Groupon and Zynga are other companies with this type of arrangement.

Compensation for LinkedIn Management (“Golden Parachute”)

As the press release suggested, LinkedIn CEO Jeffrey Weiner will stay on. While no other executives had made a formal arrangement at the proxy date, most stayed on and negotiated contracts after the proxy. Page 68 of the proxy outlines Weiner’s compensation for staying on. Page 71 also outlines which payments pertain to key executives that leave (though as of December 2017, they’re all still at LinkedIn):

m&a model case study

Background of the Merger

m&a model case study

It’s there that we learned the form of consideration (cash vs. stock) Reid Hoffman favored, the number of bidders involved, details on LinkedIn’s management of it’s sell-side process. The merger proxy  even tells us how, after the deal with Microsoft was signed, one bidder came back in and offered significantly more!

Read the behind-the-scenes events chronicled in the “Background of the Merger” section of the LinkedIn merger proxy.

What is the Role of a Fairness Opinion in M&A?

As the “background of the merger” section of the proxy chronicles, on June 11, 2016, after management, Reid Hoffman, and the board-appointed Transaction Committee recommended the approval of the merger, Qatalyst Partners submitted its fairness opinion to LinkdIn’s board:

The representatives of Qatalyst Partners then rendered Qatalyst Partners’ oral opinion to the LinkedIn Board, subsequently confirmed by delivery of a written opinion dated June 11, 2016, that, as of June 11, 2016, and based upon and subject to the various assumptions, considerations, limitations and other matters set forth therein, the per share merger consideration to be received … was fair from a financial point of view

The fairness opinion is included in Linkedin’s merger proxy.  Simply put, it says Qatalyst believes the deal is fair.

The merger proxy not only includes the fairness opinion letter, but a summary of backup assumptions, inputs and specific valuation conclusions: Qatalyst’s DCF and trading/transaction comps analyses yielded values for LinkedIn ranging from $110.46 on the low end to $257.96 on the high end. (Recall that the actual purchase price was $196.00.)  The fairness opinion is a controversial document since the financial advisor (in this case Qatalyst) is highly incentivized to align its opinion with management’s.

Learn all about the fairness opinion

What are Synergies in M&A? (Accretion/Dilution Analysis)

When LinkedIn sought a higher offer from Microsoft in the later stages of negotiation, Microsoft performed a synergy analysis to ensure that the deal would not be dilutive. This was not a major hurdle for the Microsoft-LinkedIn deal, but for many strategic acquisitions, it is.

In fact, it is so important that the acquirer often identify synergies and quantify the accretion/dilution in EPS  in the headline of the deal announcement press release, as we see in this deal announcement:

What is M&A in Investment Banking?

M&A investment banking :  We’ve seen the role played by Qatalyst Partners in the Microsoft-LinkedIn deal. Broadly, investment banks play a key role in the facilitation of transactions.

Thus, investment banking is probably the most direct career path for those focused on M&A.

  • Investment Banking Primer
  • Investment Banking Careers
  • Investment Banking Interview Questions
  • Investment Banking FAQs
  • Investment Banking M&A Analyst’s Day in the Life

While the Microsoft-LinkedIn deal was a strategic deal, many deals are done where the acquirer is a private equity company (financial deal). Private equity professionals are usually former investment banking analysts who analyze transactions on behalf of their PE firm. Their skill set overlaps with that of the investment banking M&A professional  but has a higher emphasis on due diligence (since the private equity firm puts up its own money).

Lastly, some companies employ internal teams that analyze transactions and M&A opportunities. These teams are called “corporate development” or “corporate strategy.”

Depending on the company, these teams will fall directly under the CEO or CFO. Often, the entry-level professional is hired from the investment banking industry (which develops the requisite modeling and deal skills) or directly from business school.

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Who wrote this guide? I want to cite your excellent work.

Matan Feldman, Published on: Feb 15, 2018.

Wow , this is a good refresher and joining-the-pieces kind of article. I had gone through all the M&A related content on this website and this is a good summary.

Outstanding

Thank you, Nico!

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Ace Your M&A Case Study Using These 5 Key Steps

  • Last Updated November, 2022

Mergers and acquisitions (M&A) are high-stakes strategic decisions where a firm(s) decides to acquire or merge with another firm. As M&A transactions can have a huge impact on the financials of a business, consulting firms play a pivotal role in helping to identify M&A opportunities and to project the impact of these decisions. 

M&A cases are common case types used in interviews at McKinsey, Bain, BCG, and other top management consulting firms. A typical M&A case study interview would start something like this:

The president of a national drugstore chain is considering acquiring a large, national health insurance provider. The merger would combine one company’s network of pharmacies and pharmacy management business with the health insurance operations of the other, vertically integrating the companies. He would like our help analyzing the potential benefits to customers and shareholders.

M&A cases are easy to tackle once you understand the framework and have practiced good cases. Keep reading for insights to help you ace your next M&A case study interview.

In this article, we’ll discuss:

  • Why mergers & acquisitions happen.
  • Real-world M&A examples and their implications.
  • How to approach an M&A case study interview.
  • An end-to-end M&A case study example.

Let’s get started!

Why Do Mergers & Acquisitions Happen?

There are many reasons for corporations to enter M&A transactions. They will vary based on each side of the table. 

For the buyer, the reasons can be:

  • Driving revenue growth. As companies mature and their organic revenue growth (i.e., from their own business) slows, M&A becomes a key way to increase market share and enter new markets.
  • Strengthening market position. With a larger market share, companies can capture more of an industry’s profits through higher sales volumes and/or greater pricing power, while vertical integration (e.g., buying a supplier) allows for faster responses to changes in customer demand.
  • Capturing cost synergies. Large businesses can drive down input costs with scale economics as well as consolidate back-office operations to lower overhead costs. (Example of scale economies: larger corporations can negotiate higher discounts on the products and services they buy. Example of consolidated back-office operations: each organization may have 50 people in their finance department, but the combined organization might only need 70, eliminating 30 salaries.)
  • Undertaking PE deals. Private equity firms will buy a majority stake in a company to take control and transform the operations of the business (e.g., bring in new top management or fund growth to increase profitability).
  • Accessing new technology and top talent. This is especially common in highly competitive and innovation-driven industries such as technology and biotech. 

For the seller, the reasons can be: 

  • Accessing resources. A smaller business can benefit from the capabilities (e.g., product distribution or knowledge) of a larger business in driving growth.
  • Gaining needed liquidity. Businesses facing financial difficulties may look for a well-capitalized business to acquire them, alleviating the stress.
  • Creating shareholder exit opportunities . This is very common for startups where founders and investors want to liquidate their shares.

There are many other variables in the complex process of merging two companies. That’s why advisors are always needed to help management to make the best long-term decision.

Real-world Merger and Acquisition Examples and Their Implications

Let’s go through a couple recent merger and acquisition examples and briefly explain how they will impact the companies.

Nail the case & fit interview with strategies from former MBB Interviewers that have helped 89.6% of our clients pass the case interview.

KKR Acquisition of Ocean Yield

KKR, one of the largest private equity firms in the world, bought a 60% stake worth over $800 million in Ocean Yield, a Norwegian company operating in the ship leasing industry. KKR is expected to drive revenue growth (e.g., add-on acquisitions) and improve operational efficiency (e.g., reduce costs by moving some business operations to lower-cost countries) by leveraging its capital, network, and expertise. KKR will ultimately seek to profit from this investment by selling Ocean Yield or selling shares through an IPO.

ConocoPhillips Acquisition of Concho Resources

ConocoPhillips, one of the largest oil and gas companies in the world with a current market cap of $150 billion, acquired Concho Resources which also operates in oil and gas exploration and production in North America. The combination of the companies is expected to generate financial and operational benefits such as:

  • Provide access to low-cost oil and gas reserves which should improve investment returns.
  • Strengthen the balance sheet (cash position) to improve resilience through economic downturns.
  • Generate annual cost savings of $500 million.
  • Combine know-how and best practices in oil exploration and production operations and improve focus on ESG commitments (environmental, social, and governance).

How to Approach an M&A Case Study Interview

Like any other case interview, you want to spend the first few moments thinking through all the elements of the problem and structuring your approach. Also, there is no one right way to approach an M&A case but it should include the following: 

  • Breakdown of value drivers (revenue growth and cost synergies) 
  • Understanding of the investment cost
  • Understanding of the risks. (For example, if the newly formed company would be too large relative to its industry competitors, regulators might block a merger as anti-competitive.) 

Example issue tree for an M&A case study: 

  • Will the deal allow them to expand into new geographies or product categories?
  • Will each of the companies be able to cross-sell the others’ products? 
  • Will they have more leverage over prices? 
  • Will it lower input costs? 
  • Decrease overhead costs? 
  • How much will the investment cost? 
  • Will the value of incremental revenues and/or cost savings generate incremental profit? 
  • What is the payback period or IRR (internal rate of return)? 
  • What are the regulatory risks that could prevent the transaction from occurring? 
  • How will competitors react to the transaction?
  • What will be the impact on the morale of the employees? Is the deal going to impact the turnover rate? 

An End-to-end BCG M&A Case Study Example

Case prompt:

Your client is the CEO of a major English soccer team. He’s called you while brimming with excitement after receiving news that Lionel Messi is looking for a new team. Players of Messi’s quality rarely become available and would surely improve any team. However, with COVID-19 restricting budgets, money is tight and the team needs to generate a return. He’d like you to figure out what the right amount of money to offer is.

First, you’ll need to ensure you understand the problem you need to solve in this M&A case by repeating it back to your interviewer. If you need a refresher on the 4 Steps to Solving a Consulting Case Interview , check out our guide.

Second, you’ll outline your approach to the case. Stop reading and consider how you’d structure your analysis of this case. After you outline your approach, read on and see what issues you addressed, and which you didn’t consider. Remember that you want your structure to be MECE and to have a couple of levels in your Issue Tree .

Example M&A Case Study Issue Tree

  • Revenue: What are the incremental ticket sales? Jersey sales? TV/ad revenues?
  • Costs: What are the acquisition fees and salary costs? 
  • How will the competitors respond? Will this start a talent arms race?  
  • Will his goal contribution (the core success metric for a soccer forward) stay high?
  • Age / Career Arc? – How many more years will he be able to play?
  • Will he want to come to this team?
  • Are there cheaper alternatives to recruiting Messi?
  • Language barriers?
  • Injury risk (could increase with age)
  • Could he ask to leave our club in a few years?
  • Style of play – Will he work well with the rest of the team?

Analysis of an M&A Case Study

After you outline the structure you’ll use to solve this case, your interviewer hands you an exhibit with information on recent transfers of top forwards.

In soccer transfers, the acquiring team must pay the player’s current team a transfer fee. They then negotiate a contract with the player.

From this exhibit, you see that the average transfer fee for forwards is multiple is about $5 million times the player’s goal contributions. You should also note that older players will trade at lower multiples because they will not continue playing for as long. 

Based on this data, you’ll want to ask your interviewer how old Messi is and you’ll find out that he’s 35. We can say that Messi should be trading at 2-3x last season’s goal contributions. Ask for Messi’s goal contribution and will find out that it is 55 goals. We can conclude that Messi should trade at about $140 million. 

Now that you understand the up-front costs of bringing Messi onto the team, you need to analyze the incremental revenue the team will gain.

Calculating Incremental Revenue in an M&A Case Example

In your conversation with your interviewer on the value Messi will bring to the team, you learn the following: 

  • The team plays 25 home matches per year, with an average ticket price of $50. The stadium has 60,000 seats and is 83.33% full.
  • Each fan typically spends $10 on food and beverages.
  • TV rights are assigned based on popularity – the team currently receives $150 million per year in revenue.
  • Sponsors currently pay $50 million a year.
  • In the past, the team has sold 1 million jerseys for $100 each, but only receives a 25% margin.

Current Revenue Calculation:

  • Ticket revenues: 60,000 seats * 83.33% (5/6) fill rate * $50 ticket * 25 games = $62.5 million.
  • Food & beverage revenues: 60,000 seats * 83.33% * $10 food and beverage * 25 games = $12.5 million.
  • TV, streaming broadcast, and sponsorship revenues: Broadcast ($150 million) + Sponsorship ($50 million) = $200 million.
  • Jersey and merchandise revenues: 1 million jerseys * $100 jersey * 25% margin = $25 million.
  • Total revenues = $300 million.

You’ll need to ask questions about how acquiring Messi will change the team’s revenues. When you do, you’ll learn the following: 

  • Given Messi’s significant commercial draw, the team would expect to sell out every home game, and charge $15 more per ticket.
  • Broadcast revenue would increase by 10% and sponsorship would double.
  • Last year, Messi had the highest-selling jersey in the world, selling 2 million units. The team expects to sell that many each year of his contract, but it would cannibalize 50% of their current jersey sales. Pricing and margins would remain the same.
  • Messi is the second highest-paid player in the world, with a salary of $100 million per year. His agents take a 10% fee annually.

Future Revenue Calculation:

  • 60,000 seats * 100% fill rate * $65 ticket * 25 games = $97.5 million.
  • 60,000 seats * 100% * $10 food and beverage * 25 games = $15 million.
  • Broadcast ($150 million*110% = $165 million) + Sponsorship ($100 million) = $265 million.
  • 2 million new jerseys + 1 million old jerseys * (50% cannibalization rate) = 2.5 million total jerseys * $100 * 25% margin = $62.5 million.
  • Total revenues = $440 million.

This leads to incremental revenue of $140 million per year. 

  • Next, we need to know the incremental annual profits. Messi will have a very high salary which is expected to be $110 million per year. This leads to incremental annual profits of $30 million.
  • With an upfront cost of $140 million and incremental annual profits of $30 million, the payback period for acquiring Messi is just under 5 years.

Presenting Your Recommendation in an M&A Case

  • Messi will require a transfer fee of approximately $140 million. The breakeven period is a little less than 5 years. 
  • There are probably other financial opportunities that would pay back faster, but a player of the quality of Messi will boost the morale of the club and improve the quality of play, which should build the long-term value of the brand.
  • Further due diligence on incremental revenue potential.
  • Messi’s ability to play at the highest level for more than 5 years.
  • Potential for winning additional sponsorship deals.

5 Tips for Solving M&A Case Study Interviews

In this article, we’ve covered:

  • The rationale for M&A.
  • Recent M&A transactions and their implications.
  • The framework for solving M&A case interviews.
  • AnM&A case study example.

Still have questions?

If you have more questions about M&A case study interviews, leave them in the comments below. One of My Consulting Offer’s case coaches will answer them.

Other people prepping for mergers and acquisition cases found the following pages helpful:

  • Our Ultimate Guide to Case Interview Prep
  • Types of Case Interviews
  • Consulting Case Interview Examples
  • Market Entry Case Framework
  • Consulting Behavioral Interviews

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m&a model case study

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Mergers & Acquisitions (M&A) are often an answer to broader problems during case interviews

Merger & acquisition cases are best practiced using mock interviews.

Many  growth strategy  case studies eventually lead to M&A questions. For instance, companies with excess funds, searching for ways to grow quickly might be interested in acquiring upstream or downstream suppliers (vertical integration), direct competitors (horizontal integration), complementary businesses, or even unrelated businesses to diversify their portfolio. The most important requirement for an M&A is that it must increase the shareholders' value, and it must have a cultural fit even when the decision financially makes sense. 

Analogous to making a purchase at a grocery store, M&A can be viewed as a "buying decision". In general, we know that a consumer first determines the "need" to buy a product, followed by analyzing whether he or she can afford the product. After analyzing the first 2 critical factors, the consumer might look at the long/short term benefits of the product. Applying similar logic in M&A cases:

  • Why does the company want to acquire?
  • How much is the target company asking for its purchase price & is it fair (see cost-benefit analysis )? Can the acquiring company afford to pay the valuation? Financial valuation will generally include industry & company analysis.
  • Benefits - potential synergies.
  • Feasibility and risks (cultural and economical).

Key areas to analyze: assets, target, industry, and feasibility 

When you are sure that it is an M&A case, proceed with the following analyzes after structuring the case as discussed above: 

Analyze the client’s company

  • (a) Strategic (market position, growth opportunities, diversification of product portfolio)
  • (b) Defensive (acquisition by another competitor could make the competitor unconquerable)
  • (c) Synergies/value creation (cost-saving opportunities such as  economies of scale , cross-selling, brand)
  • (d) Undervalued (ineffective management, unfavorable market, and the client has the power to bring the target company to its potential value)
  • In which industry does the client operate?
  • Which other businesses does the client possess? Look out for synergies ?
  • What are the client’s key customer segments?

Analyze the target industry 

Once it's clear why the client is interested in acquiring a particular company, start by looking at the industry the client wants to buy. This analysis is crucial since the outlook of the industry might overshadow the target's ability to play in it. For instance, small/unprofitable targets in a growing market can be attractive in the same way as great targets can be unattractive in a dying market.

Potential questions to assess are:

  • Can the market be segmented, and does the target only play in one of the segments of the market?
  • How big is the market?
  • What are the market’s growth figures?
  • What is the  focus ? Is it a high volume/low margin or a low volume/high margin market?
  • Are there barriers to entry ?
  • Who are the key competitors in the market?
  • How profitable are the competitors ?
  • What are possible threats ?

Analyze the target company

After analyzing the target industry, understand the target company. Try to determine its strengths and weaknesses (see SWOT analysis ) and perform a financial valuation to determine the attractiveness of the potential target.  You are technically calculating the NPV of the company, but this calculation likely is not going to be asked in the case interview . However, having the knowledge of when it is used (e.g., financial valuation) is crucial. Analyze the following information to determine the market attractiveness: 

  • The company’s market share
  • The company’s growth figures  as compared to that of competitors
  • The company’s profitability  as compared to that of competitors
  • Does the company possess any relevant patents or other useful intangibles (see Google purchasing Motorola)?
  • Which parts of the company to be acquired can benefit from synergies?
  • The company’s key customers

Analyze the feasibility of the M&A 

Finally, make sure to investigate the feasibility of the acquisition. 

Important questions here are:

  • Is the target open for an acquisition or merger in the first place? If not, can the competition acquire it?
  • Are there enough funds available (have a look at the balance sheet or cash flow statement )? Is there a chance of raising funds in the case of insufficient funds through loans etc.?
  • Is the client experienced in the integration of acquired companies? Could a merger pose organizational/management problems for the client?
  • Are there other risks associated with a merger? (For example, think of political implications and risks of failure, like with the failed merger of Daimler and Chrysler.)

Key takeaways

You should now be able to evaluate the venture’s financial and qualitative attractiveness for the client. If you conclude that the client should go on with the M&A, make sure to structure your conclusions in the end. Your suggestions should also include:

  • potential upsides of the merger
  • potential risks and how are we planning to overcome/mitigate them

Related Cases

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Bain Case: Old Winery

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TKMC Case: Portfolio optimization of a holding company

General holding, chip equity, paper print.

How to master M&A consulting case studies?

Mergers and acquisitions (M&A) consulting case studies

M&A deals can involve huge sums of money. For instance, the beer company AB InBev spent $130bn on SAB Miller, one of its largest competitors, in 2015. As a comparison, South Africa's GDP was ~$300bn the same year.

These situations can be extremely stressful for companies' executives both on the buying and selling sides. Most CEOs only do a handful of acquisitions in their career and are therefore not that familiar with the process. If things go wrong, they could literally lose their job.

As a consequence, management consultants are often brought into these situations to help. Most top firms including McKinsey, BCG and Bain have Partners specialised in helping CEOs and CFOs navigate M&A.

There is therefore a good chance that you will come across an M&A case study at some point in your consulting interviews . Preparing for this situation is important. Let's first step through why companies buy each other in the first place. Second, let's discuss how you should structure your framework in an M&A case interview. And finally, let's practice on an M&A case example.

Click here to practise 1-on-1 with MBB ex-interviewers

Why do companies buy each other.

Imagine you are the CEO of a large beer company called AB InBev. What are the reasons you would decide to buy your competitor SAB Miller? Let's step through the three most common ones.

Reason #1: Undervaluation

The first reason you might decide to buy SAB Miller is that you think it is undervalued by the stock market. For instance, SAB Miller owns leading beer brands in Africa and China. And your analysis might suggest that beer consumption in these markets is going to grow even faster than everyone else expects. The stock market might value SAB Miller at $130bn, but you think it is actually worth $150bn because of the insights you on have on Africa and China. If that's only reason you are buying, you would behave as a pure financial investor.

Reason #2: Control

The second reason you might buy SAB Miller is that you think it is poorly managed and you can do a better job than the current management if you get control. For instance, you might think that SAB Miller's marketing team really isn't doing a good job. The current revenues of the company are $50bn, but you estimate that you can grow these revenues to $55bn by adjusting the marketing messages and without spending additional money. In that case, you'll pay $130bn for SAB Miller today, but once you've adjusted the marketing strategy and increased revenues, it will be worth much more.

Reason #3: Synergies

The final reason you might buy SAB Miller for $130bn is that you think you can create value by combining it with your own company. Let's assume AB InBev was worth $200bn at the time of the purchase. As the CEO you could have reasons to believe that the combination of both companies would be worth MORE than the individual parts; i.e. more than $330bn ($200bn + $130bn). For instance, if you combine both entities, you might decide to keep the AB InBev marketing team and to let go the SAB Miller one. The combined entity would maintain the same revenues but have lower costs and therefore higher profits. This is what's called synergies.

Having a high-level understanding of the three concepts above is more than enough for the purpose of case interview preparation . But if you are interested in the topic and would like to read more about it, we would recommend the following McKinsey article about successful acquisition strategies .

M&A case framework

Right, now that you have a high-level understanding of why companies buy each other in the first place, let's discuss the framework you should use to analyse the transaction.

Partners at McKinsey, BCG and Bain typically look at 4 areas when working on M&A cases. Let's step through them one by one and list the questions you'd want to answer in each.

1. The market

The first area consultants typically analyse in M&A cases is the market. This is extremely important because a big part of the success or failure of the acquisition will depend on broader market dynamics. Here are some of the questions you could look into:

  • Are both companies (buyer / target) in the same markets (e.g. geographies, customers, etc.)?
  • How big is the market? And how fast is it growing?
  • How profitable is the market? And is its profitability stable?
  • How intense is the competition? Are there more and more players?
  • How heavily regulated is the market? Are there barriers to entry?

2. The target

The second important area to analyse is the company you are thinking of acquiring (i.e. the target). Your overall objective here will be to understand how attractive it is both financially and strategically.

  • What is the current and future financial position of the target (e.g.: revenues, profits, etc.)? Is it under / overvalued?
  • Does the target own any assets (e.g.: technology, brands, etc.) or capabilities (e.g.: manufacturing know-how) that are strategically important to the buyer?
  • What's the quality of the current management? Do we believe we can add value by getting control and running the company better?
  • Is the target company's culture very different? If so, are we confident it could still integrate well with the buyer?

3. The buyer

The third area consultants typically analyse is the buyer (i.e. the company buying the target). It is important to have a good understanding of what's motivating the purchase the target and whether the buyer has adequate financial resources.

  • What's the acquisition rationale? Undervaluation, control, synergies or a combination?
  • Can the buyer easily finance the acquisition? Or will it need to lend money?
  • Does the buyer have any experience in integrating companies? Was it successful in the past?
  • Is this the right time for the buyer to acquire another player? Does it risk losing focus?

4. Synergies and risks

And finally, the last area to analyse is the synergies and risks related to the acquisition. This is usually the hardest part of the analysis as it is the most uncertain.

  • What is the value of the individual and combined entities?
  • Are there cost synergies (e.g.: duplication of roles, stronger buying power, etc.)?
  • Are there revenue synergies (e.g.: product cross-selling, using the target's distribution channels for the buyer's products, etc.)?
  • What are the biggest risks that could make the acquisition fail (e.g. culture fit, regulation, etc.)?

It is almost impossible to cover all these aspects in a 40mins case interview. Once you will have laid out your framework, your interviewer will then typically make you focus on a specific area of the framework for the rest of the case. This is usually the market, or the target company. But can also sometimes be the other two points.

M&A case examples

Ok, now that you know how to analyse M&A situations, let's step through a few real life examples of acquisitions and their rationale. For each example, you should take a few minutes to apply the framework you've just learned. Once you have done that, you can then read the actual acquisition rationale.

Situation #1: At the beginning of the 2010s, IBM went on an acquisition spree and purchased 43 companies over 3 years for an average of $350 million each. All of these companies had smaller scale than IBM and slightly different technology.

Rationale: The main reason IBM decided to buy these 40+ companies is that they could all benefit from the firm's global sales force. Indeed IBM has a presence in the largest software markets in the world (e.g. North America, Europe, etc.) that smaller companies just don't have. IBM estimates that thanks to its footprint it could accelerate the growth of the companies it purchased by more than 40 percent over the two years following the acquisition in some cases. This is a typical product distribution synergy.

Situation #2: In 2010, Apple decided to buy Siri, its now famous voice assistant. And in 2014, it decided to purchase Beats Electronics which had just launched a music streaming business. Both acquisitions were motivated by similar reasons.

Rationale: In both the Siri and Beats cases, Apple had the capabilities to develop the technology / product it was purchasing itself. It could have built its own voice assistant, and its own music streaming business. But it decided not to. The reason they thought it would be better to buy a competitor is that it was going to enable them to offer these solutions to their customers QUICKER. To be more precise, they probably estimated that offering these products quicker was worth more money than the savings they would make by developping the technology on their own. This is a typical revenue synergy that's widespread in the technology space.

Situation #3: Volkswagen, Audi and Porsche have been combined companies since 2012. Mergers are common in the automative industry and usually motivated by a central reason.

Rationale: The cost to develop a new car platform is really high. It takes years, hundreds of people and millions of dollars. By belonging to the same group, Volkswagen, Audi and Porsche can actually share car platforms and reuse them for different models with different brands. For instance, the Audi Q7, the Porsche Cayenne and the VW Tourage all run on the same underlying platform. This is a typical cost synergy.

Acquisitions are high-stake situations during which CEOs often feel they need the support of consultants. You should therefore expect to come across M&A cases at some point during your interviews. That being said, your interviewer won't expect you to be an M&A expert. Having a high-level understanding of what motivates companies to buy each other as well as knowing the framework listed above should be sufficient M&A knowledge.

After all, M&A cases, are normal case interviews. What will determine if you succeed or not is your ability to think and communicate in a structured way, not your detailed knowledge of how M&A works. So it's a good idea to spend some time on M&A cases, but don't let it distract you from your broader case interview preparation.

Mock interviews

The best way to improve at case interviews is to practise interviewing out loud, and you can do that in three main ways:

  • Interview yourself (out loud)
  • Practise interviewing with friends or family
  • Practise interviewing with ex-interviewers

Practising by yourself is a great way to get started, and can help you get more comfortable with the flow of a case interview. However, this type of practice won’t prepare you for realistic interview conditions. 

After getting some practice on your own, you should find someone who can do a mock interview with you, like a friend or family member.

We’d also recommend that you practise 1-1 with ex-interviewers from top consulting firms . This is the best way to replicate the conditions of a real case interview, and to get feedback from someone who understands the process extremely well.

Click here to book your mock case interview.

Interview coach and candidate conduct a video call

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  • Published: 02 January 2024

Exploring stakeholder engagement in urban village renovation projects through a mixed-method approach to social network analysis: a case study of Tianjin

  • Xiaoru Zheng 1 ,
  • Chunling Sun 1 &
  • Jingjing Liu 1  

Humanities and Social Sciences Communications volume  11 , Article number:  27 ( 2024 ) Cite this article

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  • Complex networks
  • Social policy

The stakeholder relationship network in urban village renovation projects is highly complex, exhibiting dynamic changes at different stages. Therefore, exploring the characteristics of the interaction networks among stakeholders at each stage and the changes in their role positioning is crucial for achieving collaborative governance involving multiple stakeholders. By employing a mixed research methodology comprising single-case analysis and social network analysis, this study aimed to explore stakeholder networks’ characteristics and evolution patterns at each stage of the renovation project. Moreover, it seeks to identify breakthroughs for collaborative governance. The research revealed that the main constraints to stakeholder collaboration in urban village renovation projects are low public participation in the early preparation stage, weak network situation of stakeholders during the demolition and resettlement compensation stage, and significant clique fragmentation during the development and construction implementation stages. This study recommended approaches such as transforming the development model, establishing public status, leveraging the resource-driving advantages of core stakeholders, and establishing a network-sharing platform. Through these means, various stakeholders could be guided to be effectively involved in the entire project construction process, leading to deep cooperation among multiple stakeholders.

Introduction

As China’s urbanization accelerates, cities are gradually shifting towards redeveloping existing assets. Urban village renovation has become an important initiative for enhancing high-quality urban development (Pan and Du, 2021 ). Researchers estimated that the investment scale in urban renewal would be expected to reach 9.2 trillion yuan by 2030, accounting for approximately 11% of gross fixed capital formation (Xu, 2021 ). However, urban villages, as non-standardized construction areas, present prominent challenges compared to typical urban renewal projects, including complex stakeholder interest, unclear property rights, diverse transformation goals, and weak governance levels. Moreover, the distinct demands of various stakeholders, such as the government, developers, and residents, can lead to severe negative impacts if mishandled (Yu et al. 2019 , Zhu et al. 2022 ). In the practice of urban village renovation, incidents like violent demolitions and mass protests are not uncommon (Mai et al. 2022 , Yu et al. 2017 ). The coordinative nature of stakeholder relationships plays an essential role in urban village renovation projects (Cao and Deng, 2021 ). Different stakeholders are not independent but interdependent and play diverse roles in decision-making in the process of urban village renovation (Zhuang et al. 2019 ). It has also been shown that collaborative governance among stakeholders is key to addressing management issues in urban village renovation (Li et al. 2020 , Liu et al. 2021 ). Therefore, clarifying the complex role of various stakeholders in renovation projects and exploring diverse collaborative governance models become crucial aspects of urban village renovation projects (Chen et al. 2022 , Wang et al. 2021 ).

Research on stakeholder relationships in urban village renovation projects mainly focuses on three aspects. The first one is the status and roles of stakeholders. For instance, The demands and role characteristics of key stakeholders, including the government, developers, and residents, play a decisive role in urban village renovation projects (He et al. 2023 , Liu et al. 2021 ). The second aspect is the stakeholders and their interrelationships, such as the mechanism on interest distribution (Jiang et al. 2020 , Zhou et al. 2017 , Zhuang et al. 2017 ), mechanism on conflict resolution (Panahi et al. 2017 , Wang et al. 2022 ), stakeholders’ behaviour and game theory (Chu et al. 2020 , Guo et al. 2018 , Zhu et al. 2022 ), and collaborative governance models (Li et al. 2022 , Liu et al. 2021 ). Furthermore, there are concerted efforts in exploring and innovating theoretical foundations and research methodology. Zhuang et al. ( 2019 ) innovatively combined qualitative and quantitative methods. Liu et al. ( 2021 ) expanded the theoretical foundation by integrating stakeholder theory with cooperative theory and symbiosis theory. Zhang et al. ( 2021 ) made a transition from individual analysis to network analysis. Current studies have discussed the status and role of stakeholders, their interrelationships, and theoretical approaches in urban village renovation. However, they have overlooked that the urban village renovation project is a dynamic process involving multiple stages, at each of which the composition and importance of stakeholders are different (Aaltonen and Kujala, 2010 , Antillon et al. 2018 ). Moreover, the studies on interaction networks and role positions among stakeholders at various stages during renovation projects are limited. Therefore, it is essential to initiate a comprehensive analysis of stakeholder collaborative relationships and role functional positioning from the perspective of the entire life cycle of the urban village renovation project (Wu et al. 2020 , Yu et al. 2019 ). This approach serves as a necessary prerequisite for a deeper understanding of stakeholders’ rights and responsibilities, intending to overcome the dilemma of “governance failure”, leverage the advantages of the leading resources, and achieve win-win collaboration among multiple stakeholders.

Based on the preceding analysis, this study employed stakeholder theory and social network analysis to conduct a case study on an urban village renovation project in Tianjin, China. The objectives of this study are to address specific inquiries within the urban village renovation project, such as identifying stakeholders at each project stage, analyzing their interactions, examining variations in roles and functions across stages, and exploring strategies for achieving multi-stakeholder governance.

Literature review

This section consists of four subsections. First, it describes the implementation challenges, international experience, and the main processes of urban village renovation projects. Second, it reviews previous studies on stakeholders and their interrelationships in urban village renovation projects. Next, the application of Social Network Analysis (SNA) methods and their relevance to the research questions in this paper are presented. Last, the gap in previous research is summarized, leading to this paper’s content and main contributions.

Urban village renovation and the life cycle of urban village renovation projects

Urban villages represent a typical urban challenge arising from China’s rapid urbanization, reflecting the legacy of the urban-rural dual land system (Zeng et al. 2022 ). Within these urban villages, numerous private residences and commercial facilities have been built to foster the growth of the rental economy, leading to limited urban space expansion and a deviation from regional planning and positioning (Chen et al. 2023 ). Recognizing the significance of these issues, the Chinese government has issued a series of policies and guidance documents to promote the optimization of urban spatial structure and enhance overall quality. However, due to the complexity of property rights, the diversity of functions, and the plurality of stakeholders, the governance of informal settlements, particularly in urban villages, remains highly complex and challenging (Paula et al. 2023 , Wei et al. 2022 ).

The urbanization trend in countries around the world indicated that even developed countries with 300 years of urbanization experience had been plagued with informal housing issues for more than a century (Chen et al. 2023 , Marques, 2016 ). Urbanization in the United Kingdom underwent a transition from government-led slum clearance movements to a gradual shift towards profit-oriented market operations (Banks and Carpenter, 2017 , Becker, 1951 ). Currently, the UK government incorporates social, economic, and environmental considerations into urban renewal decisions, achieving renewal goals through the coordinated efforts of government, market, and community (Huang and Liu, 2018 ). Singapore, evolving from a slum in the 1960s to a current global city, offered many successful lessons for other countries to learn from (Li, 2021 ), such as establishing dedicated urban renewal departments, attracting private funding, emphasizing historical and cultural preservation, and encouraging public participation (Tang, 2023 , Yeoh and Huang, 1996 ). Brazil, as a developing country undergoing urbanization, transformed large-scale demolition into inclusive in-situ upgrading (Annie and Greenlee, 2017 , Marques, 2016 ). Systematic institutional design and refined implementation strategies played a crucial role in Brazil’s diverse governance of informal housing (Hong and Chen, 2023 , Maria and Alvaro, 2019 ).

Based on international experience, despite the distinct development context of China’s urban village renovation compared to other countries, the core essence revolves around exploring the governance path characterized by pluralistic co-management, inclusiveness, and fairness. Drawing lessons from the urbanization development experience of other countries and exploring a renovation and governance path that aligns with China’s urban-rural dichotomy are key factors for the successful implementation of urban village renovation projects.

The categorization of the life cycle stages in urban renewal projects remains a subject of debate across various research perspectives. For example, to manage the risks in old residential renovation, Huo et al. ( 2023 ) divided the project into four stages: decision-making, design, construction, operation, and maintenance. Cui et al. ( 2021 ) divided the project cycle into demolition, construction, operation and maintenance, and re-retirement stages to quantify the energy consumption of different retrofit strategies. (Qin and Miao, 2015 ), studying the development process of public participation in urban village renovation, segmented the project cycle into three stages: pre-establishment, mid-term consultation, and demolition and commencement of construction. The demolition stage stands out as a unique stage in urban village renovation projects, characterized by highly complex interrelationships among stakeholders (Yu et al. 2017 ). Zhuang et al. ( 2019 ) focused on the decision-making stage and categorized it into seven stages: project application, plan development, field survey, etc. Although the names and subdivisions of the project stages varied based on the research questions, the study of South et al. ( 2018 ) found that all projects encompassed four stages throughout their life cycle, i.e., project initiation, organizational preparation, project implementation and project completion.

Stakeholders and their interrelationships in urban village renovation projects

Freeman ( 1984 ) originally introduced the concept of stakeholders, defining them as “groups without whose support an organization cannot exist”. Subsequently, scholars across diverse disciplines, including economics, sociology, and management, expanded and adjusted stakeholder definitions within their respective fields. This led to stakeholders being broadly defined as any group or individual capable of influencing or being influenced by the achievement of organizational goals (Magill et al. 2015 , Shah and Guild, 2022 , Uribe et al. 2018 , Zarghami and Dumrak, 2021 ).

As an interdisciplinary theory, stakeholder theory has been widely applied in urban village renovation projects, primarily focusing on the analysis of government, enterprises, and residents (Li, 2012 , Lin et al. 2022 , Liu et al. 2018 ). For instance, He et al. ( 2023 ) explored the role and influence of local governments in a multi-stakeholder context, identifying three types of government involvement: government-led incentive, government-regulated coordination, and government-operated coalition. Du et al. ( 2022 ) focused on resident satisfaction and emphasized the importance of “social networks and social protection,” “social reciprocity and trust,” “social participation and accessibility,” and “community cohesion” in enhancing resident satisfaction. Meanwhile, some scholars discovered that social organizations, planners, and news media, while not core stakeholders, also play an essential role in implementing urban village renovation projects (Li et al. 2022 , Li et al. 2020 , Priemus, 2006 ).

Different stakeholders exhibit significant differences in their demands (He et al. 2019 ). Coordinating diverse stakeholder relationships has become a focal point of urban village renovation studies (Liu et al. 2021 ). Mai et al. ( 2022 ) investigated the interactive relationships and their responses to social risks among residents, social organizations, local government, and developers. They found that “residents’ needs,” “cooperation status,” and “level of trust” are crucial for risk management, effectively leveraging China’s collectivist culture to reduce social risks. Wu et al. ( 2020 ), using the renovation of Putuo District in Shanghai as an example, explored the rights, interests, and knowledge of 42 stakeholders in the project decision-making process to deepen the comprehensive understanding of stakeholders and construct a decision-making matrix for land redevelopment. Zhou et al. ( 2022 ) argued that the collision of value among diverse stakeholders is the catalyst for value conflicts. They established an analysis framework combining Stakeholder Analysis (SA), Social Network Analysis (SNA), and the Theory of Inventive Problem Solving (TRIZ) to identify key value conflicts and stakeholders, thus driving the successful implementation of the projects. Mi ( 2021 ) furthermore integrated stakeholders with the theory of collaborative governance, analyzing the influencing factors of stakeholder cooperation in urban village renovation projects under the principles of co-building, co-governance, and sharing.

Social network analysis: an effective method for analyzing stakeholder relationships

Social network analysis (SNA) originated in the 1930s as a quantitative analysis method (Moreno, 1934 ). Integrating mathematical and computational applications, SNA is utilized to analyze complex interdependencies among various elements and comprehend the characteristics and implications of these relationship structures (Dowding, 1995 ). As an effective method, SNA has been widely applied in sociology, psychology, economics, and organizational management (Yuan et al. 2021 , Zhang et al. 2022 ).

SNA has significant advantages in the study of stakeholder relationships (Wang et al. 2021 ). Firstly, SNA depicts the stakeholder relationship network by the interconnections among stakeholders, providing a more intuitive observation of their links and interactions (Lienert et al. 2013 ). Secondly, SNA situates individual stakeholders within the entire stakeholder network, offering a clear view of the collective characteristics of stakeholders in the relationship network (Leticia et al. 2017 ). Finally, SNA quantifies the importance of individual stakeholders in the stakeholder network and their key functional roles.

Given the advantages of SNA, using SNA to analyze project stakeholder relationships has become a significant trend in the field of project management (Luo et al. 2023 , Wang et al. 2021 ). For instance, Wang et al. ( 2020 ) employed SNA to construct a stakeholder network in BIM-delivered projects, analyzing the characteristics of stakeholder relationships and identifying the core stakeholders in BIM project applications. Zhang et al. ( 2021 ) compared and analyzed complex stakeholder behaviour in urban renewal projects in Shenzhen and Chongqing using SNA. According to their analysis results, they proposed corresponding governance strategies, such as optimizing the negotiation platform for urban renewal, increasing multi-stakeholder participation, and implementing policies to regulate participant behaviour. Seyed and Esmail ( 2023 ) emphasized the significant role of stakeholder management in lake restoration programs, using SNA to quantify the roles of stakeholders and enhance the management system of lake restoration projects. Clearly, SNA has accumulated extensive research outcomes in the field of project stakeholder relations. It provides a clearer understanding of the roles of various stakeholders in the project, allowing for the leverage of their respective resources advantages to improve project performance(Cook and Gerbasi, 2006 ; Zhuang et al. 2019 ).

Stakeholders in urban village renovation projects form a complex organizational structure with social network characteristics (Jin et al. 2023 ). Using SNA to quantitatively analyze the complex relationships among stakeholders in urban village renovation projects has significant advantages. Therefore, this study intends to employ SNA to analyze the interaction among diverse stakeholders. Consequently, it will offer a clearer understanding of the relationship dynamics among stakeholders in urban village renovation projects, as well as the individual stakeholder’s role and position during the implementation of the renovation.

Research gaps

The present literature has revealed two notable trends. Firstly, research about stakeholders is shifting towards diverse stakeholder participation and collaborative governance (Li et al. 2022 ). Additionally, characterizing and analyzing stakeholder relationships from a network perspective has become a novel research approach (Jin et al. 2023 ). However, existing studies have explored the interaction among multiple stakeholders from a static network perspective, lacking in-depth research on the evolution of stakeholder relationships at different stages of urban village renovation projects. Therefore, further identification of research gaps is warranted.

First of all, there is a limited amount of research that adequately considers the relationships among diverse stakeholders in urban village renovation projects. Previous studies indicate that in the new era, urban village renovation projects involve not only core stakeholders such as the government, developers, and the public. Coordinating relationships among diverse stakeholders has become a key factor in the successful implementation of the current urban village renovation projects (Mai et al. 2022 ). The collaborative governance model is the primary objective for establishing stakeholder cooperation in urban village renovation projects (Mi, 2021 ; Liu et al. 2021 ). Therefore, paying attention to the relationship among diverse stakeholders in urban village renovation projects is crucial for their successful execution. Moreover, constructing a stakeholder relationship network from a social network perspective proves to be more effective in quantifying stakeholder relationships than other methods.

Secondly, stakeholder relationships have rarely been explored in stages in previous studies. The urban village renovation projects are characterized by a lengthy project cycle, involvement of diverse stakeholders, and complex interest relationships (Zeng et al. 2022 ). The composition and significance of stakeholders vary at each stage of the project (Zhuang et al. 2019 ). However, existing research has rarely considered how stakeholder relationships and their roles evolve across different stages of urban village renovation projects. Therefore, examining stakeholder relationships in urban village renovation projects from a comprehensive life cycle perspective holds practical significance for promoting stakeholder cooperation.

As discussed in the preceding paragraphs, this study conducted a case study on the urban village renovation project in Tianjin, China. Taking a comprehensive life cycle perspective and employing the Social Network Analysis (SNA) method, this paper thoroughly analyzed the evolution characteristics of stakeholder networks and the patterns of role evolution at different stages of the project, thereby addressing the current research gap. This study not only provided an overall understanding of the interactive dynamics among stakeholders across various stages of the urban village renovation project but also provided clearer insights into the position and role of each stakeholder during different stages. Consequently, it opens the black box of stakeholder relations in the urban village renovation project, enabling stakeholders to leverage their resource advantages and enhance the project’s governance efficiency.

Materials and methodology

As shown in Fig. 1 , this study consisted of four main steps. Initially, stakeholders in the case project were identified and categorized through field research and expert interviews. Subsequently, a questionnaire survey was used to determine the strength of project stakeholders’ relationships and formulate a relationship matrix. Following this, the social network analysis method was applied to analyze the overall network characteristics of stakeholders, the group structure characteristics, and the evolutionary patterns of central roles throughout the entire process. Lastly, based on the analysis results, the dilemma issues of collaborative stakeholder governance are identified, and targeted countermeasures are proposed.

figure 1

Research process.

This study utilized a mixed research approach, combining a single case study and social network analysis. On the one hand, single-case studies are inclined to distort behavioural patterns from complex phenomena, providing an opportunity to deepen the understanding of such phenomena, especially in multi-stage longitudinal studies (Eisenhardt and Graebner, 2007 ). Through the single case study method, this research tracked and observed the behavioural changes of stakeholders at each stage, capturing the characteristics of the stakeholder relationships at each stage and elaborating on their behaviours with primary data. On the other hand, social network analysis is a quantitative research method that combines graphical and mathematical models to analyze the positions and interrelationships of social members in a network (Koene, 1984 ). Exploring stakeholder interaction at each stage of the urban village renovation project from the social network perspective allows for a more comprehensive and objective portrayal of overall structural characteristics, group evolution characteristics, and node function evolution law in each stage (Mok et al. 2017 ). In conclusion, the mixed research method combining a single case study and social network analysis is well-suited for studying stakeholder relationships in urban village renovation projects. Leveraging the advantages and characteristics of each method, it contributes to a deeper understanding of stakeholder interactions and role characteristics.

This study used UCINET 6.0 to analyze the stakeholder network of the urban village renovation project and employed NETDRAW software to create the relationship diagram. To improve stakeholder collaboration, analyzing stakeholder relationships in urban village renovation projects involves examining the overall structure, group characteristics, and participant status. Network density and average node distance are commonly used indicators to evaluate the overall network characteristics of stakeholder networks (Liu, 2009 ). To further explore the interactions between stakeholders, core-periphery and small clique analyses were selected to investigate stakeholder groups in this study. Through core-periphery and clique analyses, it is possible to identify core stakeholders at each project stage and determine which stakeholder relationships are more closely related (Liu Fang, 2015 ). In addition, the authors applied three frequently used centrality measures to analyze the stakeholder network, including degree centrality, betweenness centrality, and closeness centrality (Wei et al. 2022 ). Centrality analysis provides a clearer understanding of the roles and major contributions of stakeholders in the urban village renovation process. Detailed descriptions and formulas for each indicator are tabulated in Table 1 .

This study selected an urban village renovation project in Beichen District, Tianjin, China (refer to Fig. 2 for the location map). Before the renovation, the area primarily consisted of bungalows with dilapidated houses, outdated infrastructure, lagging surrounding facilities, and inadequate road construction. Security issues, as well as hygiene and fire hazards, were prevalent (see Fig. 3 for pictures before renovation). The government launched the project in 2005 to improve the living environment for residents. However, due to the difficulties in negotiation regarding the demolition and relocation, the demolition and relocation work of the project gradually commenced only in 2015. The first batch of villagers successfully relocated back to their homes in 2021. Currently, more than 3,900 housing units have been completed, with 1307 units under construction. It is expected that the villagers will move in by early 2024. Figure 4 illustrates the overall layout after the completion of the project, showing a significant improvement in residents’ living environment. Based on the construction focus of the project and the characteristics of stakeholder stages, the project was divided into four stages: Preliminary Preparation stage (PP), Demolition and Relocation Compensation stage (DC), Development, Construction and Implementation stage (CI), and Post-Maintenance and Operation stage (MO).

figure 2

Location map of Tianjin Beichen District urban village renovation.

figure 3

Pictures of the project before renovation.

figure 4

Pictures of the project after renovation.

The main reasons for selecting this case are as follows. (1) Representative development mode: The project adopts a mode characterized by government-led, village-enterprise collaboration and market-oriented operation. The government implements the urban village renovation project, with the construction unit responsible for demolition and relocation work and compensating the villagers. Currently, this development mode is widely applied in urban village renovation projects across most Chinese cities. (2) Complexity of stakeholder relationships: The project includes stakeholders at various government levels, developers, villagers, constructors, and other stakeholders with complex relationships. (3) Data accessibility: Due to geographic and relational advantages, the authors have been tracking this urban village renovation project since 2014, gaining information on the project’s progress and key details. Multiple in-depth interviews were conducted with stakeholders such as government officials, developers, and villagers, accumulating a large amount of material information for this case study. (4) Project lifecycle completeness: The renovation project went through the entire lifecycle from initiation to maintenance and operation, meeting the requirements for a comprehensive lifecycle analysis of the project.

Construction of stakeholder network in urban village renovation project

The stakeholder network consists of nodes (stakeholders) and connections (relationship strength between stakeholders). Therefore, to construct the stakeholder network in the urban village renovation project, it is essential to first identify the stakeholders in the case project. Subsequently, a stakeholder matrix was constructed based on the relationships between stakeholders to facilitate the subsequent analysis of network metrics.

Stakeholders identification

This study employed a combined approach of literature review and focus group interviews to identify stakeholders in urban village renovation projects. This approach ensured both the reliability of stakeholder identification and the enhanced practical relevance of the research outcomes. First of all, stakeholders in the urban village renovation project were systematically categorized through an in-depth literature review, summarizing the primary functions associated with each stakeholder. Subsequently, a group discussion was conducted with six individuals actively involved in the case project, including two government officials from the project’s district, the project manager from the developer, the project manager from the constructor, the manager from the design unit, and the manager from the consultant. Through this collaborative discussion, 11 stakeholders were identified and established as the initial stakeholder list. During the subsequent field research, based on the results obtained from semi-structured interviews with various project participants, two additional stakeholders, i.e. news media and the property management unit, were incorporated into the original list. Consequently, a final list of 13 stakeholders was established, with stakeholders systematically staged according to the practical conditions of the renovation (refer to Table 2 ).

Establishment of stakeholder relationship matrix

The questionnaire was designed to determine the strength of stakeholder relationships. The respondents were selected based on two criteria: (1) they represented one of the 13 stakeholders listed; (2) they had experience participating in urban village renovation projects. Before designing the questionnaire, the method for measuring relationship strength was determined in the first place. Due to the significant roles of rights and interests in stakeholder relationships in urban village renovation (Zhuang et al. 2019 ), this study used “the existence of contractual relationships,” “the existence of subordinate relationships or mutual interests,” and “the existence of communication opportunities” as the criteria to measure relationship strength, assigning “5,” “3,” and “1,” respectively. If none of the above relationships exist, a value of “0” is assigned. The questionnaire consisted of two main parts. The first part contains background information about the respondents filling out the questionnaire. The second part measures and scores the strength of the relationship between the stakeholders.

Questionnaires were distributed both online and offline to project stakeholders in four different periods: June to July 2014, September to October 2016, June to July 2018, and September to October 2021. These four time periods corresponded to different stages of project development. In 2014, 153 questionnaires were distributed, and 142 valid questionnaires were collected. In 2016, 136 questionnaires were distributed, and 130 valid questionnaires were collected. In 2018, 143 questionnaires were distributed, and 136 valid questionnaires were collected. In 2021, 162 questionnaires were distributed, and 152 valid questionnaires were collected. In total, 560 valid questionnaires were collected across the four periods, with a response rate of over 94%. Good reliability and consistency of all collected questionnaires were verified. Finally, this study constructed a four-stage “Stakeholder-Stakeholder” adjacency matrix based on the relationship strength data obtained from the questionnaires. The four-stage “Stakeholder-Stakeholder” adjacency matrix can be found in Supplementary Table S1 , Supplementary Table S2 , Supplementary Table S3 , and Supplementary Table S4 online.

Network characteristics and analysis

Network structure.

The interaction network among different stakeholders at different stages is shown in Fig. 5 , providing a visual presentation of stakeholder interactions during each stage. The nodes in the diagram represent stakeholders, and the connecting lines define the relationships between them. Based on the relation network diagram, this study further measured indicators such as network density and average distance to describe the evolution of the stakeholder relationship network in the project, which are tabulated in Table 3 .

figure 5

a Collaborative network diagram in the PP stage; b Collaborative network diagram in the DC stage; c Collaborative network diagram in the CI stage; d Collaborative network diagram in the MO stage.

In the preliminary preparation stage (PP stage), the network density is the highest, and the average distance between nodes is the lowest, indicating a close connection among stakeholders in this stage, with efficient information transmission. This is because the government is responsible for coordinating relevant functional units, handling approval procedures such as reporting and project approval, organizing experts for feasibility consultations, identifying cooperation partners, and conducting in-depth public appeals and other preparatory work. In the demolition and resettlement compensation stage (DC stage), the network density is the lowest, and the average distance between nodes is the highest. This is because stakeholders such as financial institutions and legal institutions, although entering the relationship network at this stage, have low connectivity with other stakeholders. During the development, construction, and implementation stage (CI stage), the network density slightly increases compared to the previous stage but remains at a relatively low level, showing that the connections among various stakeholders are not very close. These results indicated that the constructor carried out the main work in this stage. Although stakeholders such as the government, construction management unit, and the public are involved in the CI stage, they mostly play a supervisory role with limited interactions among themselves. The overall network had a “center-periphery” characteristic. In the post-maintenance and operation stage (MO stage), the network connections are simpler, but the network density is higher. This indicated close connections among stakeholders in this stage. The comprehensive network had an “overall coordinated” characteristic.

Overall, the degree of collaboration in the stakeholder relation network showed a “U”-shaped trend, while the efficiency of information transmission showed an inverted “U”-shaped trend. In the PP and MO stages, there were relatively fewer stakeholders, but the connections were tight, resulting in fast information transmission efficiency. In contrast, the intermediate two stages involve a higher number of stakeholders, but the degree of closeness significantly decreases, leading to lower information transmission efficiency.

The evolution characteristics of each project stage in this study are attributed to the following reasons: (1) In PP stage, the government holds significant discourse power and has strong coordination capabilities. It can effectively and efficiently collaborate with other stakeholders to jointly complete the pre-project feasibility study. Additionally, each stakeholder shows a strong willingness to participate due to their interests. (2) The major conflict during the DC stage lies in coordinating the interests between the government and the public. Stakeholders face trust issues and information asymmetry due to disputes over interests. (3) The stakeholders in the CI stage are highly specialized, with clear divisions of labor. However, their business activities are singular, and opportunities for interaction are limited, leading to information barrier challenges. (4) During the MO stage, the formal contractual relationship between the property management unit and the public plays a crucial role in establishing strong connections.

Group structure characteristics

Stakeholder “core-periphery” analysis.

The previous section analyzed the collaborative network characteristics and evolution patterns of each stage from the perspective of the overall network. Nevertheless, it was difficult to precisely identify the “core-periphery” stakeholders in different stages. Therefore, this study used UCINET software to analyze the “core-periphery” structure of the collaborative network in each stage of the urban village renovation project. Stakeholders were classified into two categories based on the mean value of the core degree as the delineation criterion: core stakeholders and peripheral stakeholders. The analysis results are shown in Table 4 .

Generally, the core stakeholders in the relation network of the urban village renovation project have been changing across different stages. The core stakeholders in the collaborative network in the PP stage were the government, consulting service units and construction units, engaging in in-depth discussions on issues such as the feasibility study and design planning of the urban renovation project. In the DC stage, the core stakeholders in the collaborative network were the construction units, the public, and the land consolidation and acquisition units, mainly coordinating matters related to demolition, resettlement, and compensation between the government and the public. The core stakeholders in the collaborative network in the CI stage were the constructors, construction units, and consulting services, with construction becoming the primary goal of this stage. During the MO stage, property management units and the public became the core stakeholders in the collaborative network.

Small clique analysis

The clique phenomenon can not only affect the relationship changes within the clique but often has some driving or inhibiting effects on the overall structure of the collaborative network (Liu Fang, 2015 ). Therefore, in this study, the UCINET software’s iterative correlation convergence algorithm (CONCOR) function was used to analyze the clique phenomena existing in each stage of the urban village renovation project. Figure 6 shows the cohesive subgroup diagram in each stage of the urban village renovation project. This paper calculated the density matrix for each stage of cliques to provide a more in-depth analysis of the relationships within and between small cliques. The network density at each stage was used as the threshold value to obtain the binary matrix. If it is greater than the overall network density, the value is set to 1, indicating a close connection. If it is less than the overall network density, the value is set to 0, indicating loose connections within or between small cliques. The specific results are shown in Table 5 .

figure 6

According to the small cliques diagram (Fig. 6 ) and the small cliques binary matrix (Table 5 ), there were three small cliques in the PP stage. C1 included the government, construction unit, and the public; C2 included the construction management unit and consulting service unit; and C3 included the community committee and the media. C1, driven by the core roles of the government and construction unit, has close ties with C2 and C3, while the connections between C2 and C3 are relatively sparse. During the DC stage, a new small clique C1 was formed by construction management units, such as the Planning Bureau and the Environmental Protection Bureau, acting as a separate entity and not directly connecting with other stakeholders. This indicates that during this stage, the government had assigned the expropriation and compensation affairs to construction management units. The frequency of information exchange among small cliques was low compared to the previous stage. In the CI stage, the government did not form an alliance, while stakeholders within C2 had relatively loose connections. However, the C1 and C2 cliques were exceptionally closely related. Meanwhile, C3 had little contact with other small cliques, leading to apparent clique fragmentation. The MO stage consisted of three small cliques. The media, as an independent clique, had less frequent connections with other stakeholders during this stage. Stakeholders within C1 and C2, as well as the connections between the two small cliques, had a high level of closeness.

Small cliques exist in the collaborative network in all stages of urban village renovation projects. During the PP and MO stages, there was a high degree of internal and inter-clique connectivity, while in the two intermediate stages, there was a noticeable phenomenon of information isolation and mutual fragmentation among small cliques. The core stakeholders, with their resource-driving advantage, form small cliques, showing significantly higher frequencies of internal and inter-clique connections compared to small cliques composed of peripheral stakeholders.

Individual role evolution

In the previous section, the “corer-periphery” structure confirmed the differences in the importance of stakeholders at various stages in the urban village renovation project. However, what differences exist in the roles and functions of the same stakeholders in different stages? Therefore, this paper selected stakeholders involved in the entire process as the research subjects: government, construction unit, the public, and the media. The evolutionary changes in the roles and functions of these four stakeholders at different stages were analyzed and presented in Fig. 7 . Due to variations in the number of stakeholders in each stage, the centralities were normalized before the analysis. The degree centrality can be found as Supplementary Table S5 online. The betweenness centrality can be found as Supplementary Table S6 online. The closeness centrality can be found as Supplementary Table S7 online.

figure 7

The government had the highest degree centrality and betweenness centrality in the PP stage, indicating that it had the most direct connections with other stakeholders. Its interaction ability and control over resources were the strongest, establishing a prominent position and wielding significant power in the collaborative network. In the DC stage, the degree centrality and betweenness centrality of the government significantly decreased, while those of construction units rose to the highest level. This shift indicated that during this stage, the construction unit replaced the government in taking on the primary coordination and organizational responsibilities. The degree centrality of construction units during the CI stage remained much higher than that of the government, but the betweenness centrality was only slightly higher. This suggested that in this stage, there was no significant difference in the resource control capabilities between the construction units and the government. Combining these with the analysis results from the “core-periphery “ structure in Table 4 , it is clear that the construction units play a more crucial role in this stage. In the MO stage, the degree centrality and betweenness centrality of the construction unit and the government decreased. The property management unit and the public assumed central positions in this stage, while the construction unit and the government were mainly responsible for the post-project operational and maintenance supervision and resident satisfaction survey. The degree centrality and betweenness centrality of the public in the entire renovation project process exhibited an “N”-shaped trend, with the lowest points at the DC stages. Associated with analyzing small cliques in this stage, the public mainly consisted of surrounding residents, together with the media forming a small clique, which limited interactions with other stakeholders. In the MO stage, the degree centrality and betweenness centrality of the public reached the highest level, indicating that the public had the most direct connections with other stakeholders during this stage, demonstrating strong interactive capabilities and resource control. The closeness centrality of the media maintained at the lowest level throughout the entire project, which suggested the media in the collaborative network was less influenced by other stakeholders and exhibited a high degree of independence.

The preceding discussions indicated that there were differences in the functions of different stakeholders within the same stage, and the roles of the same stakeholder also vary across different stages. Throughout the entire lifecycle of the project, the government underwent a transformation from a “leader” to a “coordinator.” The public transitioned from a “passive recipient” to an “active participant.” Construction units had strong control over resources, assuming the role of a “resource controller.” Although the media operates as peripheral stakeholders, its high independence allows it to supervise project implementation effectively, with the attributes of an “edge supervisor.”

Results discussion and suggestions

The published literature finds that the success of urban village renovation projects is closely related to stakeholder coordination (Chen et al. 2022 ; Jiang et al. 2020 ). In addition, there are differences in the composition and importance of stakeholders at various stages of urban village renovation projects (Antillon et al. 2018 ; Zhang, 2022 ). Therefore, this study provides an in-depth analysis of stakeholder relationships in urban village renovation projects from an entire lifecycle perspective based on the Social Network Analysis (SNA) method. According to the social network analysis results from the previous section, this section provides a detailed discussion of the weakness in stakeholder collaboration and offers recommendations to enhance stakeholder cooperation in Chinese urban village renovation projects.

Results discussion: the weaknesses of stakeholder collaborative relationships

The connectivity of the stakeholder network at the dc stage needs to be improved.

There was limited interaction among stakeholders in the DC stages, and the overall network density was at a relatively low level, indicating a weak network structure. The reasons for the weak connectivity among stakeholders in this stage are multifaceted. Firstly, stakeholders such as the government, construction units, and demolished villagers have diverse interests, leading to potential conflicts and divergences with a lack of effective communication and coordination mechanisms, resulting in weak connections among them. Secondly, the government and construction units often hold more information and power, while the public, as a disadvantaged group, has relatively limited information. Hence, a predicament of information asymmetry and a lack of trust are created, leading to weakened connectivity.

Especially since the public, as a vulnerable group, has relatively limited information. Finally, this stage primarily involves a continuous negotiation process between construction units and displaced residents to seek a relatively balanced outcome. While financial institutions, legal institutions, and the media are stakeholders in this stage, they mainly serve supportive and supervisory roles, with limited opportunities for interaction with other stakeholders, contributing to weak network connectivity.

Small clique fragmentation is a significant difficulty in the CI stage

The phenomena of small cliques were present in the relationship networks in all stages of the renovation project. During the CI stages, there was a noticeable fragmentation among small cliques. This stage comprised four sub-cliques, with the government not forming an alliance. There was more frequent communication between C1 (construction units and constructor) and C2 (construction management units, consulting services units, suppliers, and financial institutions). In contrast, the communication frequency between C3 (the public and the media) and the other small cliques was significantly lower, with distinct fragmentation. Based on the analysis results, it is clear that the main task at this stage was construction. Thus, there was higher communication frequency among stakeholders related to on-site construction, such as construction units, constructors, and consulting service units. Oppositely, the external parties to on-site construction, such as the public and the media, were less connected to other stakeholders, showing a clear state of fragmentation.

The importance of the public in the PP stage is under-explored

Public participation has consistently been a hot issue in urban village renovation projects under people-oriented and livelihood-oriented construction goals. The network analysis results revealed high public participation in the DC and MO stages and low public participation in the PP and CI stages. In addition, empirical findings from field research and expert interviews revealed that understanding the public’s needs and incorporating them into the early decision-making system in the PP stage could help mitigate disputes among stakeholders in the later stages. There are two main reasons for the low level of public participation in the PP stage. Firstly, there are shortcomings in the public participation process, including insufficient effectiveness of information disclosure mechanism and policy promotion, imperfection of information feedback mechanism, and non-implementation of the feedback loop of public opinions. Secondly, the public’s willingness and capacity to participate are hindered and influenced by their comprehension of policies, available free time and physical health, negotiation and decision-making abilities, and proficiency in professional knowledge.

Recommendations to promote stakeholders’ collaboration

Fully consider villager needs and flexibly transform development mode.

In the past, the renovation of urban villages was usually carried out through land expropriation, transforming rural collective land into state-owned land for renovation. However, some villagers developed strong resistance due to factors such as unwillingness to change lifestyle habits and inadequate compensation amount, resulting in a “nailed-down” dilemma and generating huge time costs and economic pressure. Nowadays, with the continuous exploration of urban village renovation projects, the Chinese government has introduced a series of policies related to residential land use and collective-operated construction land. Without expropriation or forced demolition, these policies can still improve the living environment of urban villages. Therefore, during the PP stage of the renovation, the government should conduct a comprehensive investigation and interviews with villagers to understand their willingness to renovate. This enables the identification of more adaptable development patterns and effectively circumvents the effects of structural mismatches. Compared to rigid governance methods, this consultative approach can fundamentally solve the resistance to demolition and relocation and effectively shorten the time cycle of urban village renovation projects.

Facilitate two-way communication channels to ensure public participation

The public is the stakeholder and the ultimate beneficiary of the urban village renovation project. However, at the PP stage, public participation is primarily organized by village collectives, involving consultation and decision-making, where the public can only passively receive information about the renovation without influencing decisions in return. To address the low level of public participation, especially at the PP stage, the promotion by the government and the media should be increased first, clearly outlining the expected benefits of participation. This helps the public recognize the convenience in their lives after the renovation project, thereby enhancing their willingness to participate. Secondly, organizing the dissemination of professional knowledge and providing training can improve the public’s understanding of policies and the entire process of innovation projects, fostering their participation capabilities. Finally, improving public participation procedures can ensure effective public participation. The government should establish diverse channels for public participation, refine the procedures, and effectively obtain feedback from public opinions. Village collectives should act as liaisons between the government and the villagers, facilitating the connection between policy distribution and opinion feedback. By cultivating public awareness and capabilities in participation and facilitating two-way communication channels, the public can genuinely influence the entire decision-making process of the renovation project.

Utilize the resource-driven advantages of core stakeholders

In the urban village renovation project, the government should fully mobilize the enthusiasm of all stakeholders. As a strategy planner, the government has advantages in the governance of stakeholder relations with a high position and far-sighted perspective. In the new era of urban village renovation projects, the government should grasp the strategic direction of the project renovation and coordinate the interests of multiple stakeholders. As a market entity, the construction unit has a keen vision and flexible characteristics. In the process of implementing renovation, the effective allocation of resources and collaboration among stakeholders is inseparable from the consultation and exchange of construction units. In the new era of urban village renovation projects, the emphasis extends beyond the decisive role of the construction unit in allocating resources to a heightened focus on sustainable development. The future approach should break away from the traditional real estate development model of “one-time transactions” and instead integrate urban village renovation with guaranteed rental housing. This approach not only enhances residents’ living environment but also ensures the long-term operational sustainability of construction units.

Establish an online sharing platform to break the clique fragmentation dilemma

Strengthening informatization and network construction is essential to enhance stakeholders’ governance efficiency in the new situation. Establishing an interactive sharing platform could effectively integrate information resources among various stakeholders, such as the government, construction units, constructors, and the public. This breaks down communication barriers and addresses the fragmentation of governance systems, ensuring the realization of collaborative governance among multiple stakeholders in urban village renovation projects. Particularly during the CI stage, on-site construction is mainly carried out by core stakeholders with solid professionalism, such as construction units, constructors, and consulting services, with limited involvement from marginal stakeholders like villagers and the media. Establishing online sharing platforms could increase communication frequency among stakeholders and effectively alleviate the clique fragmentation phenomenon during this stage.

To leverage their respective resource advantages and achieve effective collaboration, stakeholders aim to implement collaborative governance in urban village renovation projects. This goal is pursued due to the complexity of stakeholder relationships in such projects and the variations in the composition and significance of stakeholders at different stages of project construction. Therefore, this study utilized a mixed research method, combining a single case study and social network analysis, to investigate the dynamics in stakeholder relationship networks during the construction of an urban village renovation project in Tianjin, China. By analyzing the evolution of stakeholder relationships, the study uncovered the challenges associated with achieving stakeholder collaboration. The findings revealed that the main constraints to achieving collaboration among stakeholders in the urban village renovation project were the limited public participation in the PP stage, the weak connections in the DC stage, and the apparent clique fragmentation in stakeholder networks during the CI stage.

How do we achieve the goal of collaborative governance among stakeholders? Firstly, it is essential to thoroughly understand the residents’ needs and align the development mode with their actual requirements. Secondly, increasing public participation in the PP stage is crucial. This could effectively minimize the negative impact of public dissatisfaction in the later stages and enhance overall public satisfaction with the project. Thirdly, the core stakeholders should leverage their resource-driven advantage and incorporate more stakeholders into the collaboration network. Finally, establishing a network-sharing platform proves to be an effective measure to overcome small clique fragmentation.

Although this study specifically focused on the urban village renovation in Tianjin, China, its theoretical, methodological, and practical implications extend beyond this context and could be applicable to other cities and countries. Firstly, from a theoretical perspective, the constructed theoretical knowledge system that combines stakeholder analysis with synergistic governance goals provides a clearer goal orientation for stakeholder research in urban villages. Secondly, in terms of methodology, the adoption of a mixed research method, combining a single case study with social network analysis, acknowledges the complementary nature of qualitative data and quantitative networks. This approach aids in gaining a more in-depth understanding of stakeholder interactions and role characteristics. The mixed qualitative and quantitative research methodological framework proves advantageous in stakeholder relations research and can be continued in future studies. Finally, in terms of practical significance, this study conducts a comprehensive examination of stakeholder relations throughout the entire lifecycle, aligning more closely with the current practices in implementing urban village renovation projects. The results of the analysis could help stakeholders, including the government, developers, the public, and the media, better understand their roles and critical strengths in the various stages of urban village redevelopment, thus enhancing decision-making efficiency and effectiveness.

At present, the renovation method of urban villages in the Beichen District of Tianjin is a typical model in China’s urban village renovation projects, and the research findings hold significant reference value. In addition, the stakeholder analysis model constructed in this study, from an entire lifecycle perspective, enables a more profound exploration of stakeholder interrelationships and is equally applicable in other project stakeholder studies. Future research could be further developed in the following areas: (1) The measurement of stakeholder relations could be improved. This study identified measures of “5”, “3”, “1,” and “0” mainly from the perspective of power and interests, where the actual stakeholder relationships are more complex. Future research could adopt a more comprehensive approach by assigning values to interaction intensity, communication frequency, and cooperation frequency. (2) A comparative study of stakeholder relations under different development modes could be conducted. This study found that differences in the development models, including government-led, government-enterprise cooperative, and village collective self-initiated, would lead to significant differences in stakeholder relationships. Future research could explore the variability of stakeholder relationships under different development models.

Data availability

All data generated or analyzed during this study are included in this published article and its supplementary files.

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This research was supported by the National Natural Science Fund of China (Grant No. 72072126).

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Zheng, X., Sun, C. & Liu, J. Exploring stakeholder engagement in urban village renovation projects through a mixed-method approach to social network analysis: a case study of Tianjin. Humanit Soc Sci Commun 11 , 27 (2024). https://doi.org/10.1057/s41599-023-02536-7

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Title: segment change model (scm) for unsupervised change detection in vhr remote sensing images: a case study of buildings.

Abstract: The field of Remote Sensing (RS) widely employs Change Detection (CD) on very-high-resolution (VHR) images. A majority of extant deep-learning-based methods hinge on annotated samples to complete the CD process. Recently, the emergence of Vision Foundation Model (VFM) enables zero-shot predictions in particular vision tasks. In this work, we propose an unsupervised CD method named Segment Change Model (SCM), built upon the Segment Anything Model (SAM) and Contrastive Language-Image Pre-training (CLIP). Our method recalibrates features extracted at different scales and integrates them in a top-down manner to enhance discriminative change edges. We further design an innovative Piecewise Semantic Attention (PSA) scheme, which can offer semantic representation without training, thereby minimize pseudo change phenomenon. Through conducting experiments on two public datasets, the proposed SCM increases the mIoU from 46.09% to 53.67% on the LEVIR-CD dataset, and from 47.56% to 52.14% on the WHU-CD dataset. Our codes are available at this https URL .

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27 Dec 2023  ·  Xiaoliang Tan , Guanzhou Chen , Tong Wang , Jiaqi Wang , Xiaodong Zhang · Edit social preview

The field of Remote Sensing (RS) widely employs Change Detection (CD) on very-high-resolution (VHR) images. A majority of extant deep-learning-based methods hinge on annotated samples to complete the CD process. Recently, the emergence of Vision Foundation Model (VFM) enables zero-shot predictions in particular vision tasks. In this work, we propose an unsupervised CD method named Segment Change Model (SCM), built upon the Segment Anything Model (SAM) and Contrastive Language-Image Pre-training (CLIP). Our method recalibrates features extracted at different scales and integrates them in a top-down manner to enhance discriminative change edges. We further design an innovative Piecewise Semantic Attention (PSA) scheme, which can offer semantic representation without training, thereby minimize pseudo change phenomenon. Through conducting experiments on two public datasets, the proposed SCM increases the mIoU from 46.09% to 53.67% on the LEVIR-CD dataset, and from 47.56% to 52.14% on the WHU-CD dataset. Our codes are available at https://github.com/StephenApX/UCD-SCM.

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