M&A: Finding Good Acquisition Targets

The acquisition process is nothing without good targets. These targets generally don’t just appear on the horizon - Management has to be proactive in searching them out and creating a long list or database. The companies in this database can come from tip-offs from people you know, small companies you heard about or just old fashioned research. But as is often the case, a pro-active approach here is far more effective than a passive one: the best acquisition opportunities often aren’t immediately obvious. And managers of potential acquisitions won’t come knocking on your door asking you to buy their company.

Some of the companies we’re in touch with keep an active database of over fifty companies that might become acquisitions at some stage. Fifty companies isn’t even that excessive a number. Keeping a list of this size is good practice for any management looking to partake in M&A: The best acquisitions are often opportunistic. But opportunistic shouldn’t be confused with catch as catch can: Preparing a long list of potential targets allows firms to be opportunistic – to be ready for good acquisitions as opportunities present themselves.

What I mean by that is that there’s no wrong time to make an acquisition. If a target firm provides a compelling answer to why the company would want to acquire it, any time there’s an opportunity to buy that target, the company should be doing everything in its power to acquire it. There just isn’t a bad time to acquire a firm which is a good strategic fit. Body Shop, a cosmetics retailer coined a phrase, “extinct is forever” and the same could be said for missing out on a target which is a good strategic fit. Once the opportunity to purchase that company has passed, the chances are, it’s not going to arise again.

“Why?”

Why is the over-riding question here. If management can’t answer this question when looking at targets, the likelihood is that it’s not a good target for the company. At some point during the search for companies or even during the negotiation process, the CEO is going to ask “why are we doing this?” In the most simplistic terms, management will know they’ve found a good company when the answer to this question is compelling – essentially, an acquisition that meets the strategic objectives of the acquiring business. The companies in your database should answer the question why for you as soon as you see their name on that list.

Once your database has reached a good size, you’ll begin to apply filters – it’s highly unlikely you’ll approach every one of those firms. These filters should be driven by an M&A framework, which I plan to discuss in a later article. The framework is driven by your firm’s strategy and how the target you’re looking at fits in with that strategy. There are broad ‘dos’ and ‘don’ts’ here, such as not betting your firm on any acquisition and avoiding acquisitions which have the potential to detrimentally affect the reputation value of your company. But the framework I will discuss addresses these issues.

Finally, I’m often approached about the statistic which says that around 70% of acquisitions fail. This is based on academic studies which have been carried out to look at the share price of acquiring firms in the days after an M&A deal has been completed. If the stock prices of the acquiring firm goes up, the deal ‘created value;’ if not, ‘value was destroyed.’ Is this really how we should be assessing the value of M&A? Of course not – it misses so much of the value which is inherent in the deal and the strategy behind it. By identifying a target that’s a good strategic fit for your firm, there’s no reason the acquisition cannot be a long-term success.