Return On Invested Capital (“ROIC”) is my preferred measure for analyzing how well acquisitions perform post close.
My formula is not textbook and uses a couple of variations. The first uses operating cash flow, the second uses revenue in the numerator. The denominator in both instances consists of purchase consideration (cash, equity and debt), legal and advisor fees, expenses related to post-close integration including cross training and any other transaction-related expenses.
If the acquired company operates in the same industry as the acquirer, there ought to be an opportunity for the acquirer to accelerate revenue and cash flow growth by leveraging its installed customer base.
An early Christmas present for me would be if investors would start to ask their portfolio companies to walk them through M&A ROIC calculations. Ask CEOs and CFOs to disclose 1 year post-close ROIC, 2 years post-close ROIC and so forth on a deal-by-deal basis. It is important to understand the numbers behind the calculations and any assumptions used. Too many companies get credit for doing deals. Too few companies pay attention to optimizing acquired assets.