Locating Acquisition Targets
The process of locating acquisition targets typically involves a systematic series of steps. Here is a simplified overview of the process:
- Establishing Acquisition Strategy: This is the first step where you define the objectives and strategy of the acquisition. This may include enhancing market share, gaining access to new markets or technologies, achieving economies of scale, diversifying the product or service offering, or improving financial metrics.
- Defining the Acquisition Criteria: The next step is to determine the characteristics of the ideal acquisition target. These criteria may relate to the company’s size, location, market presence, technology, customer base, profitability, growth potential, and more.
- Sourcing Potential Acquisition Targets: Once you have defined your criteria, you can start identifying potential targets. This can be achieved through various means, including online research, industry databases, trade shows, financial advisors, M&A advisors, or networks in the industry.
- Preliminary Screening: After identifying potential targets, a preliminary analysis is conducted to filter out companies that don’t meet the specified criteria. This can involve analysis of the company’s financial performance, product portfolio, market presence, etc.
- Initial Contact and Expression of Interest: Once a smaller list of potential targets is identified, the acquiring company will usually approach the targets either directly or via an intermediary. An Expression of Interest (EOI) is often used as a formal way of showing interest in acquiring the company.
- Detailed Assessment and Due Diligence: For the companies that respond positively, a more detailed analysis is performed. This due diligence process can involve a thorough examination of the company’s financials, legal compliance, business operations, management team, and other aspects of the company.
- Valuation and Acquisition Proposal: Based on the due diligence findings, the acquiring company will determine the valuation of the target company and propose an acquisition deal. The deal can take many forms, such as a cash offer, stock-for-stock exchange, or a combination of both.
- Negotiation and Closing: After the initial proposal, there will usually be a period of negotiation until a final agreement is reached. The agreement is then formalized through a purchase agreement and the transaction is closed, leading to the change of control in the company.
Keep in mind that these steps can vary depending on the specific circumstances and that each step often requires input from various professionals including financial advisors, lawyers, accountants, and others.
Example of Locating Acquisition Targets
Let’s take an example of a hypothetical tech company, TechX, that’s looking to acquire another company in order to diversify its product portfolio, strengthen its technology, and expand its market presence.
- Establishing Acquisition Strategy: TechX, as the acquiring company, defines its objectives: diversify product offerings, bolster technology, and enhance market presence. They decide to look for companies that are strong in artificial intelligence and machine learning, as this is an area they want to strengthen.
- Defining the Acquisition Criteria: TechX establishes criteria for potential targets: they should be in the field of AI and machine learning, have a strong technology base, have an active user base, and demonstrate financial stability with potential for growth.
- Sourcing Potential Acquisition Targets: TechX begins identifying potential companies that meet these criteria. They utilize their internal business development team, hire an investment bank, use online databases, and network within the industry to create a list of potential targets.
- Preliminary Screening: From a list of twenty potential companies, TechX conducts a preliminary assessment based on public information and filters the list down to five companies that best meet the established criteria.
- Initial Contact and Expression of Interest: TechX reaches out to these five companies either directly or via their investment bank to express interest in potentially acquiring them. Two of these companies show interest in further discussions.
- Detailed Assessment and Due Diligence: TechX conducts detailed due diligence on these two companies, looking into their financials, legal matters, operations, customers, technology, and other aspects. After this process, they decide to proceed with one company that aligns best with their objectives.
- Valuation and Acquisition Proposal: TechX works with its financial advisors to determine a fair valuation for the target company. They make an offer to the company’s shareholders for an acquisition via a mix of cash and stock.
- Negotiation and Closing: The two companies negotiate the terms of the deal, including the purchase price and structure of the deal. After some back-and-forth and final legal reviews, they reach an agreement. The legal documents are signed, the acquisition is publicly announced, and TechX becomes the new owner of the acquired company.
This is a simplified example. In reality, the acquisition process can be quite complex and lengthy, often taking several months or even a year or more to complete.