What Makes a Company a Likely Acquisition Target?

A fascinating report has been published by Intralinks who, in conjunction with Cass Business School in London examined 23 years of data from almost 34,000 companies worldwide to identify the factors that make companies attractive M&A targets.

Whilst worth reading the full report, it concludes with a summary of six vital signs business owners should be aware of to make their company attractive to buyers.

The study found that in any year approximately 12% of all companies become the subject of an acquisition approach every year and whilst our own observations of the results achieved when companies are bought, as opposed to sold, are a topic for a different article, the parameters to assess when considering the saleability of a business are relevant in both circumstances.

The report clearly highlights that the measurements used to predict likely targets for acquisition differ distinctly when considering the attributes deemed desirable by private equity, and those by trade buyers. The metrics also draw a clear distinction between these factors when targets are differentiated between public and privately-owned companies.

The 5 factors that rank a privately-owned company’s propensity to be approached were reported to be:

Sales Growth – companies with positive sales growth in the three years prior to approach reflect as desirable targets. Target companies demonstrated a sales growth rate 2.4% higher than non-target companies.

Profitability – EBITDA to Sales ratios measured 1.2% higher in target as opposed to non-target companies.

Leverage – In the Intralinks/Cass report this factor was deemed to be the #1 predictor of whether a company would become a target. Interestingly corporate acquirers (trade buyers) favoured low debt/EBITDA ratios. Private Equity acquirers, on the other hand, sought a demonstrable ability to support debt and targeted companies that had leverage as high as 3 times that of the non-target companies.

Size – This was deemed the second most important predictor of whether a company might become the target of an acquisition – private company targets were 40% larger than their non-targets peers.

Liquidity – Liquidity of target companies, as measured by their ratio of current assets/current liabilities, is 4% lower than that of non-targets. Companies in the bottom two deciles for liquidity are on average 35% more likely to become acquisition targets in any given year than companies overall.

M&A forms an integral part of corporate company growth strategies and is the purpose for the very existence of Private Equity – The Intralinks/Crass study, therefore provides valuable insights for owners of private companies seeking to groom their business for an eventual exit.

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