By now, the statistics are well known. Most LBO fund returns net of fees are lower than S&P 500. Average returns for funds as of 2004 were less than 8%. Private equity returns have fallen with the increase in capital chasing deals. With over $450 billion sitting in private equity, and with four to five times that amount in purchasing power, investors have good reason to be nervous. The traditional private equity approach is growing increasingly risky as competition intensifies over very few deals. Buyers of all types are struggling with how to reduce the risks and increase the returns of their acquisition programs.
We propose a breakthrough approach to mergers and acquisitions. By using sophisticated Fast Track Profit Models™ to identify profit opportunities before an acquisition, the acquirer can know the profit improvement opportunities in great detail, up front. Acquirers can customize industry profit model templates to simulate the actual operations of a prospective acquisition. They can then feed actual transaction data from the prospect through this model to provide valuable and reasonably accurate insight into business profitability and performance across the enterprise. Specific opportunities and risks are more rigorously identified. The model can also quantify synergies. In this paper, we explain how this new Fast Track Profit Model™ approach works, demonstrate its success through a case study, and discuss its potential use for would-be acquirers, whether they are industry insiders or financial outsiders.