Process for identification of acquisition targets

M&A MBB PE
New answer on Jun 10, 2020
4 Answers
704 Views
Anonymous A asked on Jun 04, 2020

Dear experts,

I have encountered a case question which I am deeply struggling with.

Our client is a global media company which plans to acquire about 5-10 smaller companies across the globe over the next 3-4 years. They have asked you to design an approach for identifying, screening, and prioritizing potential targets. How would you design such an approach? What are its crucial elements and which information, data, and analyses will be most important for its application?

I am at a complete loss how to tackle this. Thanks a lot for your insights!

Overview of answers

Upvotes
  • Upvotes
  • Date ascending
  • Date descending
Best answer
Ian
Expert
Content Creator
replied on Jun 05, 2020
BCG | 100% personal interview success rate (8/8) and 95% candidate success rate | Personalized interview prep

Well, lucky for you they've given you your buckets :)

But, first you have to clarify the objective. So, what do they want to achieve with these acquisitions? Are they trying to acquire companies within their existing industry so as to reduce competition? Are they looking to acquire companies with knowledge they don't have? ARe they looking to vertically integrate? Horizontally integrate? Perhaps most importantly, are they prioritizing topline or bottomline growth? Finally, what's the budget? I.e. how big can these companies be?

Clarifying the exact purpose is incredibly important, as you cannot identify, screen, and prioritize if you don't know what you're looking for!

Let's assume you've asked this in the case. A quick and dirty approach would be

Identify

  • Look at the "world of" targets (consider below approaches)
    • Look in public sources for companies that have said they'r looking to be bought, or those that might want to be
    • Reach out to the local network to find potential targets
    • Hire a PE firm
    • Etc.
  • Once one or many of the above approaches have been selected, we can get a list of possible targets

Screen

  • From this list, we need to first eliminate anything that doesn't fit (i.e. doesn't meet table stakes). This could be
    • Too big
    • Too expensive
    • Doesn't address key objective/needs (clarified in the prompt) (i.e. not in an interesting industry, etc.)
    • Not

Prioritize

  • We should have a shortened list now, but we need to figure out what matters (relates to above clarifying question)
  • We need to pick the top 3-4 things that matter, rank them, and use those as selection criteria. Some of these could be
    • Positive cash flow
    • Genuinely interested seller
    • Fits our market
    • Fills a hole in our existing capability
    • Reduces competition
    • Gives us a new customer base
    • Is a valuable brand
    • Strong IP
    • Culture fit
    • etc.
  • We can then rank the companies across these criteria to make a shortened list of ~10-20 to approach seriously

To get the above information/data, we can:

  • Request income statements, balance sheets (or, if they're public, find them online).
  • Talk to industry experts
  • Speak with company contacts
  • Speak with company customers
  • Review government industry reports

This isn't the full answer, so feel free to reach out to talk about this in more depth!

Was this answer helpful?
Vlad
Expert
Content Creator
updated an answer on Jun 05, 2020
McKinsey / Accenture Alum / Got all BIG3 offers / Harvard Business School

Hi,

You should start with an objective. Is it revenue, profits, synergies, etc?

Then check how the client is making money. Media is a very broad definition. Also, check what is the business model of the companies the client is targeting?

You can not approach the case without knowing the objective. Here is some high-level guidance for you, but you should tailor it to the clarified objective:

Target Markets

  • Size
  • Growth rates
  • Segments and growth rates
  • Regulations & restrictions

Target Companies

  • Market share
  • Growth rates
  • Profit
  • Unit economics (Price per unit, cost per unit)
  • Key capabilities (e.g. suppliers, assets, IP, etc)
  • Synergies

Competition

  • Market shares
  • Growth rates
  • Profit
  • Unit economics (Price per unit, cost per unit)
  • Key capabilities (e.g. suppliers, assets, IP, etc)

Growth strategy:

  • Are we achieving the companies objective?
  • Time to achieve the objective
  • Required investments
  • Risks

Best!

(edited)

Was this answer helpful?
Clara
Expert
Content Creator
replied on Jun 04, 2020
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello!

Don´t worry at all, it´s the classical growth case. PM me so I can send u a solved one

Hope it helps!

Cheers,

Clara

Was this answer helpful?
Anonymous replied on Jun 10, 2020

Hi,

I totally agree with a Identify, Screen, Prioritize approach.

Prioritization is key since beyond having several candidates for potential acquisitions you should also analyze feabiility (and do not forget to think about potential disynergies, and risk of cannibalization).

David

Was this answer helpful?
0
Ian gave the best answer

Ian

Content Creator
BCG | 100% personal interview success rate (8/8) and 95% candidate success rate | Personalized interview prep
421
Meetings
36,995
Q&A Upvotes
83
Awards
67 Reviews