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Hi {{first_name}},
Depending on which study you read, somewhere between half and three-quarters of all corporate acquisitions destroy shareholder value. Over three decades, TransDigm bought roughly 80 businesses. Their loss ratio was zero.
This is the last piece in my little series on the TransDigm episode of the 50X podcast, and it’s the one closest to my day job. Because the explanation for that record isn’t brilliance. It’s a short list of refusals.
No credit for synergies. Every acquisition was underwritten as a standalone investment that had to clear a private equity style return on its own. Strategic fit, in Howley’s words, was a vague concept that got zero credit in the model.
No credit for hope. Projected new business got almost no weight, because you can’t verify someone else’s pipeline from the outside. The exit multiple was assumed to equal the entry multiple, or below it if they feared they’d been bid up. They forecast only what they could see: the installed base, the flight hours, the replacement cycle. If the deal needed a story to pencil, it didn’t pencil.
Cut the multiple in half. The working rule: whatever you pay today has to look like half that multiple on run-rate earnings within five years. They typically got there in three, because the base case was built conservative on purpose. When a model came back too close to their 20% hurdle, they didn’t celebrate. They got nervous.
Face the base case. After close, the plan was tracked quarterly, and the language around misses was blunt: we believed we bought it conservatively, so if we’re not meeting the plan, we made a mistake, and we’re going to figure out what it was. That post-mortem loop, run across dozens of deals, is where the judgment came from.
Now the part that matters if you’re a founder on the other side of the table. You might expect underwriting this strict to produce lowball offers. The opposite was true. Howley said that if a business met their criteria, they weren’t going to lose it on price. Discipline bought conviction, and conviction let them pay full, fair prices and still sleep at night. Meanwhile the buyer who paid for a story becomes your problem after closing, when the story doesn’t come true and someone has to make the numbers work anyway. The offer from a disciplined buyer is smaller on hope and larger on certainty: it closes, and the partnership that follows was priced honestly.
The whole series compresses to this: three levers, owners not employees, sunlight over averages, and math that works without the story. None of it is clever. All of it compounds. Run boringly for thirty years, it looks like 1,750x.
Talk soon,
Matt
P.S. When I’m not writing this, I’m buying and operating founder-led businesses for the long term at Eidolon Capital. If you’re a founder thinking about your next chapter, or you advise one who is, just hit reply. I read every note.