When a buyer decides to engage in an acquisition, it should do so in a methodical manner, and not in reaction to a sudden opportunity. This requires a long-term commitment to reviewing the range of possible acquisition opportunities, based on what it needs in an acquisition target. The first step in this process is to a general review of the industry in which the buyer wishes to make acquisitions. The goal of this review is to determine the types of acquisition opportunities that exist, which other companies are completing acquisitions in the same market space, and what kinds of prices are being paid.
There are a number of ways for a buyer to identify possible acquisition targets. If it wants to make acquisitions in areas closely related to its existing operations, then its sales department very likely already has an excellent idea of who the best prospects might be, since they compete with them constantly.
Some of the best acquisition candidates are current business partners. They may be customers who work closely with the buyer to develop new products, or suppliers with whom the buyer has close, long-term relationships. However, these targets generally imply either upstream or downstream acquisitions, so that the buyer becomes more vertically integrated within its industry – which needs to be a strategy decision by senior management (see the Acquisition Strategy section).
Another option is to have the acquisition team regularly accompany the sales staff to the company’s regularly-scheduled trade shows. The acquisition team can tour the various company booths for ideas. A less time-consuming alternative is to access trade show directories, make lists of which companies attended, and investigate each one.
Another search method is to subscribe to all of the industry publications, and pore through them to determine which ones regularly advertise. This is also a good way to locate subject-matter experts at other companies, since they may write articles for the trade journals.
If a target industry has a large number of public companies, then go to Yahoo Finance or Google Finance, and review the lists of competitors that are listed next to each company. A more labor-intensive method is to access the annual 10K reports of public companies and see who they list as competitors.
It is also possible to uncover targets through special industry studies. These studies may be created gratis by university professors as part of their research, but are more commonly made available through private studies that will cost the buyer anywhere from $5,000 to $20,000 to access.
Another alternative is sell-side analysts. These individuals work for banks, brokerage houses, and investment bankers, and usually specialize in the public companies located within a single industry. They are experts in those industries, and may be able to provide information about the more significant players within each one.
Standard & Poor’s issues lengthy lists of companies through its Industry Surveys. Each report covers a specific industry, and is authored by a Standard & Poor’s research analyst. The reports cover a great deal more than the names of the key players. They also note industry trends, how the industry operates, key ratios, additional references, and comparative company financial analysis. The reports cover over fifty industries, ranging from advertising to transportation.
If the buyer is searching for targets with valuable intellectual property, then it can develop its own intellectual property study of an industry. This study shows who is working on similar technologies, which ones are publishing authoritative literature on various studies, who is being cited as a reference, and who has filed for or received patents. Such a study requires a massive amount of work, and probably the retention of an intellectual property attorney to conduct investigations. Though expensive, it can reveal the direction in which technology is moving in an industry, so that a buyer can acquire key technologies in advance of its competitors.
Locating targets can be no trouble at all – they come to the buyer. The owners of privately-held firms may eventually want to cash out of their ownership positions, or do not have sufficient funds to keep plowing back into their businesses, or are running into regulatory problems – the reasons for sale are endless. Whatever the reason may be, company owners may make discrete inquiries among potential buyers, or through brokers.
Locating Acquisition Targets