Are Acquisitions Rational?
How can you make sense of Acquisitions and where can you start if you want to devise an M&A Strategy?
In the first part of this series which you can find here, I introduced the idea that there are Six Key Factors which can be identified in rationalising Acquisition Strategy.
We looked at Ability to Execute and Financial Resources from the perspective of both the Acquiror and the Target companies.
In Part 2 of the Series which you can find here, I discussed the four factors of Intent from the perspective of the Acquiror.
In this Part 3, I shall look at these four factors from the perspective of the Target Company.
So what of the Targets themselves? We have already covered the Targets’ Ability to Execute and discussed their need, personal or corporate for Capital – Financial Resources. Its time to discuss the mindset and approach of the Targets to this Rationale.
To do this, we need to work bottom up and not top down, so the first factor to discuss is Stage of Development
Targets – Stage of Development
From the Target’s perspective, their management and shareholders are working to build value (money/cash) for themselves. They need to evaluate constantly the progress they are making realising their plans and need to carefully consider when is the best time to sell the company by accepting an offer from one of our Acquirors.
If things are going well, the Targets’ management and shareholders will prefer to wait, to continue to grow the business, perhaps with additional funding rounds as an alternative to the sale of the company.
If the strategy is not proving to be so successful, they may realise that their ambitions for the future value of the company may be increasingly unlikely to be realised and if a “relatively” attractive offer is made to them, they may choose to take it rather than struggle on in the hope that things will be better.
It should be mentioned that Targets who have reached the Serices E and F stages of financing and who may be planning an IPO, end up in a trade sale. Sometimes this is a result of poor market conditions but often this happens because an acquiror steps in an makes an attractive pre-emptive bid.
In the US, where SEC filings of an intent to launch an IPO are often made months ahead of the IPO date, these filings can be tantamount to putting up a “For Sale” sign over the business.
Targets – Scale
Now we are evaluating the Target Companies ambitions for the financial returns to be made from the sale of their business. While Acquirors ambition is limited by their financial resources, those selling companies make a judgement about when in the lifecycle of the business are they likely to make the best return.
Sell too soon, when the company is small and you may make a lower return, even if there is value attributed for the future growth of the company. Leave it too late and Acquirors may feel that the future potential of the business is limited and argue for a much lower valuation multiple, which may lead to a lower offer for the company.
Clearly each case is unique and needs to be evaluated on its merits. Often the interests of the different investors (who may have invested at different times and at different valuations) may not align and the Management and Founders of the business have a more personal and parochial attitude to the sale of their “baby”
Targets – Sectors
From the Targets perspective, this is relatively simple. The Target company will have a business with particular sectoral characteristics and the key question is do these fit with the requirements of the buyer.
As we move Up these Screening Steps, from the Targets perspective matters simplify.
Targets – Strategy
This can have a significant bearing on the future of the Target business and its Management and Employees so the Acquirors strategy is highly relevant. It is down to the Target however to question its potential partner about their aims and intentions to understand what the deal might mean for them.
Zone of Confluence
It may now be apparent that from the perspective of the Acquiror and Target that there is an area which I have called the Zone of Confluence – where they naturally meet. This is shown on the diagram below.
The two parties meet between the Sectors and the Scale. For the Acquiror this is the point where they have completed their internal analysis and turn to their Target Long or Short list to find out whether the Target feels that the Scale of the deal is attractive, to understand the stage of development of the Target, to test the motivation of the Target management and shareholders to do a deal and to understand their corporate and personal need for capital.
From the opposite direction, the Target company wants to know of the potential Acquiror, whether there is a Sectoral and Strategic “Fit”, to obtain confirmation that the Acquiror has the financial resources to complete the deal and to satisfy themselves that the management and shareholders of the potential Acquiror are motivated and committed to completing a transaction.
I hope this Framework helps to provide some understanding to the meaning of Acquisition Rationale. Inevitably simplification leads to loss of detail and this discussion could be greatly extended but I wanted to try to set out my basic understanding of how the two principle parties to an M&A transaction think about the process.
In gaining this understanding, I hope that it will assist your own decisions about whether to make an acquisition or whether to accept an offer for your company and that you can use this framework to develop your own evaluative processes to greater levels of complexity and include more detail and variables.
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