An M&A case is a buy-or-walk decision. The tree is: what is the target worth alone, what extra cash does the combination create, what price leaks that cash to the seller, and what integration can destroy it. Naming “an M&A framework” is optional. Walking those four without overlap is not.
This is not a PE diligence case. PE cares about entry multiple, leverage, and exit. Strategic M&A cares about whether this buyer creates value the target cannot create alone.
Four branches that must not double-count
| Branch | Question | Typical number |
|---|---|---|
| Standalone | What cash does the target produce as-is? | EBITDA, growth, capex, one-off cleanup |
| Synergy | What extra cash exists only if we combine? | Cost takeout, revenue that needs a named channel |
| Price | What do we pay vs standalone + synergy? | Multiple, cash vs stock, earnout |
| Integration | What can fail in 24 months? | Systems, physicians, culture, antitrust |
Revenue synergies are not “cross-sell 5%.” They are a channel and a conversion. Cost synergies need a line item and a timing. If you cannot name the person who loses a job or a vendor who loses a contract, it is not a cost synergy.
Worked example: two regional hospital systems
Prompt. Eastvale Health (6 hospitals, $1.1bn revenue, $88m EBITDA) can buy Riverton Memorial (2 hospitals, $340m revenue, $22m EBITDA) for $330m cash (15× EBITDA). Eastvale’s board wants “scale.” You have 25 minutes.
Standalone. Riverton is a real business: $22m EBITDA, 6.5% margin, volume flat, payer mix already 38% Medicare. Maintenance capex $9m. Unlevered cash ≈ $13m before tax. At a 10× standalone multiple (no control, no synergy) the asset is ~$220m. The $110m gap to $330m must be filled by synergies the market has not already priced — or you overpay.
Cost synergies (credible). Duplicate corporate (revenue cycle, supply chain office, malpractice stack): Riverton’s overhead is $14m; 40% is duplicative if Eastvale’s platform can absorb it = $5.6m. Vendor contracts (implants, med-surg): 1.5% of Riverton’s $120m supply spend = $1.8m. Total run-rate cost $7.4m, year 2, 70% in year 1. Not $7.4m on day one.
Revenue synergies (skeptical). Eastvale wants to “keep cardiac in-system.” Riverton leaks ~120 cardiac cases/year to a downtown academic center. Contribution ~$8k/case. If you keep half because Eastvale has a cardiac group: 60 × $8k = $0.48m. Rounding error. Do not put $10m of “network revenue” on the slide.
Synergy value. $7.4m run-rate, tax 25%, after-tax $5.6m. Capitalize at 10× (same as standalone caution) ≈ $56m. PV haircut for year-2 ramp: ~$45m. Standalone $220m + synergy $45m ≈ $265m. Offer is $330m. You are $65m short.
Price / structure. 15× is a strategic premium. Walk, or cap the bid at ~$270m (≈12.3×) and use an earnout on the $5.6m overhead takeout so you do not pay for synergies you fail to deliver.
Integration (the deal killer even if price moved). Riverton’s medical staff is independent. Eastvale employed its cardiology group two years ago and lost 8 surgeons. Antitrust: two-hospital overlap in one county — FTC would ask about inpatient share. IT: Riverton is on a different EHR; conversion is $18m and 18 months, not in the $330m story.
Recommendation. Do not pay $330m. Bid ≤ $270m with an earnout, or walk. Scale for its own sake is a 15× tax. Risk: a for-profit chain pays 15× anyway; you lose the auction and keep your capital. That is acceptable.
When this tree is the wrong tool
The prompt is a PE paper LBO. Returns, debt, and exit multiple belong to PE due diligence and the PE case guide. Do not spend the case on “cultural fit” if they asked for IRR.
The prompt is “should we enter Germany.” That is market entry, even if an acquisition is one mode of entry. Do not open with synergy math before attractiveness.
There is no price. If they want a merger of equals with no bid, you still need standalone versus synergy, but the “overpay” branch becomes governance and who runs the combined entity.
The mistake unique to M&A cases
Paying for standalone performance as if it were synergy. Riverton’s $22m EBITDA is already in the 15×. Counting “keep their volume” as a synergy double-counts. Synergy is incremental to the standalone plan.
The second unique fail is year-1 synergy = run-rate synergy. Overhead takeout that needs EHR conversion is not in month three. Discount it or you invent NPV.
How to open in the room
“I would value Riverton standalone, then add only synergies that require this buyer, then compare to the $330m price, then flag integration and antitrust as deal-breakers even if the math closed.”
Then put $220m, $45m, $330m on the page. The gap is the case.
If they push “but we need scale for payer contracts,” quantify that claim on the revenue-synergy branch or drop it. A 1% rate lift on Eastvale’s $1.1bn from “being bigger” would be $11m — huge if true, usually not true in year 1, and often already assumed by the seller’s 15×. Do not let a slogan refill a $65m hole.
Practice a buy-or-walk tree
Structure drills on M&A prompts grade whether you separated standalone from synergy.