News / Insights

Finding the Perfect Acquisition

Merger & Acquisition deal value in Q3 2021 surpassed $1 trillion worldwide. The number of deals and average transaction sizes are larger than ever. Finding the right acquisition in a crowded market has never been more challenging. This blog summarizes how we approach preliminary acquisition target identification and screening. The chart below illustrates the concepts described in the following paragraphs.

 

Product Market Fit

Product-market alignment is a primary indicator of fit for strategic buyers. The buyer must first determine if the product suite of potential targets complements the buyers’ existing portfolio and if the markets served are overlapping or would add to the buyer’s current market coverage. Access to attractive new markets may be compelling for a buyer that is focused on strategic growth and diversification.

Acquisition targets can be classified as bolt-ons, add-ons, or step-outs with respect to product-market fit. Bolt-ons are acquisitions that perfectly fit within the buyer's current business, add-ons are those that serve adjacent market segments, and step-outs are exactly that: stepping out into new or unfamiliar market segments. Targets in each classification present distinctive opportunities (such as synergies) as well as risks to the buyer.

Technology Fit

Proprietary technologies are a major driver of many acquisitions. The buyer must consider the target’s product as well as process technologies. If advanced technologies are key to the search profile of an ideal acquisition, then the buyer must decide if they are in the market for differentiated or commodity technologies. Buyers should classify targets along the same lines as described for product-market fit.

Risk Assessment

There are risks for buyers in every transaction. The “newness” of product lines/markets and technologies are important dimensions for assessing risk. If a target company features technologies and product lines that the acquirer is already familiar with, then the risk is lower compared to a company that competes in a product-market segment or employs technologies for which the acquirer has no experience.

Competitive Positioning is another important dimension for assessing target risk. How well is the target performing relative to its peer group, and how does that affect its value? A company performing consistently in the top quartile of its industry peer group should demand a premium over one in the lower quartile. Why? There is less financial risk in the valuation.

Business Rationale

Readiness to engage is another key consideration in selecting which acquisition targets to pursue. Place yourself on the other side of the table in a transaction. Why might the seller want to explore the possibility of a business combination with an interested buyer? It could be succession, differences in the future of a company among ownership, or it could be capital needs to accelerate growth. Because the best targets may not be for sale currently, the buyer must explore the business rationale that would be compelling to an owner. Why is the buyer the “next best owner” of the business?

Conclusion

There is an old saying that opportunity favors the prepared mind. Preparing for a successful acquisition search means identifying the right targets in a systematic and thoughtful way. It also means ensuring that such targets are actionable.

 

By: Josh Miller, Robert Janei, Rohan Gudivaka, CDI Chicago