How to Identify The Right Acquisition Target

Posted on Posted in Acquisition Management

How to Identify The Right Acquisition Target

Much time and effort is expended in completing the Merger or Acquisition deal, and then successfully integrating it into the buyer’s company. But for a serial acquirer, building the pipeline of potential target candidates is the critical initial phase on the acquisition process.

As part of the strategic planning process, a company should seek to identify its current business status, and its future direction. Secondly, in order to realize these new business objectives, a gap analysis will be prepared to identify the requirements necessary to capitalize on new business opportunities. The next step is to determine how best to address these requirements: a) organically using existing resources; b) forming a joint venture or strategic alliance; or c) seeking a merger or acquisition. The business strategy, therefore, is the first step in the M&A process. The M&A strategy seeks to align the strategic vision with the business objectives.

Based on the buyer’s business objectives and desired benefits, a preliminary, comprehensive list of companies is developed which may offer the products, markets, technology or geography identified in the gap analysis. This list is reduced through internal intelligence, such as, sales and marketing personnel, senior executives, and board members. External sources of information may come from industry contacts, trade associations, and internet searches on the targets and their industry. If the target is a public company, filing with the S.E.C. under the Electronic Data Gathering and Retrieval (EDGER) system will be a good source of information. The S&P Capital IQ , SNL Financial, and Thompson One may also provide useful information on public companies. Based on the information a comparative analysis is prepared to reach a final list of firms that meet the established acquisition criteria that aligns with the buyer’s objectives.

The criteria may include but not be limited to:

  • Will the Target contribute to the business strategy?
  • Is the Target the desired size?
  •  Does the Target have the right technology, products and services?
  •  Is the Target in a high growth market?
  •  Can the Target be assimilated into the business and culture?
  •  What are the Target’s prospects for long-term growth?
  •  Is the timing optimal to pursue the Target?

Successful acquirers consider several factors to determine the priority for possible Target consideration:

  • Steady growth rate
  • Product portfolio diversification
  • Profitability
  • History of innovation
  • Market leadership or niche specialty
  • Management team
  • Special legal, regulatory or environmental issues

Developing a detailed target profile may identify existing relationships the buyer may have with the target. While the initial meeting will focus on the CEO, other executives such as the CFO or M&A executive may balance the relationship. Perhaps discussions with the target may start with interest in a partnership or joint venture as part of a long-term acquisition strategy.

During the entire targeting process there is a need to develop, add to and retain all of the information on all of the targets. Having the appropriate M&A software application will provide this capability. Should the primary target not be available, the data is immediately available on the next candidate. Likewise, all discussions and meeting minutes with and relating to the target should be retained as the buyer’s institutional knowledge. Some acquisitions may take several years to come to fruition, with possible changes in the buyer’s M&A staff. Therefore, it is always advisable to consider the long term objective and retain the information in the system archives.

Resource: General Electric Capital 2012