Acquisition is one of the corporate restructuring techniques where one company (acquirer) obtains an effective control over the assets or management of another company (target) with or without any combination of companies. Thus in the acquisition, two or more companies may remain independent, separate entities but control of companies may change.
Acquisition is a major strategic decision for expansion of business. Generally, in acquisition, larger firms acquire smaller firms. As acquisition is a major corporate decision, it requires a high level of preparation and investment decision. There are various considerations during the process of acquisition. Out of considerations, selection of the target company is a very critical decision.
Factors to be considered for the selection of a target company
- Growth Factor:
Most of the market studies suggest that companies with higher average growth rate are the potential target for the acquisition deal. The companies which are in the growth stage of their business life cycle are targeted by the giant companies. Therefore, while considering a target company, one should look for the growth potential of that company.
It is not necessarily an essential component of a target company but no one would like to invest in a failing company unless there is some hidden interest.
- Market Impact
Acquisition should have a synergetic impact i.e. the acquirer company should have some impact on their business due to the acquisition deal. Therefore, it is necessary for the acquirer company to assess the potential of the target company and what the target company has to offer to the acquirer company. The combined company should generate something valuable to the customers and market.
- Valuation
Valuation of target company is another crucial factor of selecting target company. It is very much essential to get the valuation of the target company right. Acquisition involves huge investment therefore, it is necessary to have a true value of that company so that the value of investment holds true. Under valuation or over valuation of the target company will affect the funds of the acquiring company.
A sick company is less preferred as a target unless it has a different purpose.
- Clean Operating History
A target company must have a clean operating history. There must not be any unjustifiable issue with the operation of the company. Issues such as legal issues, tax issues, liability issues, ownership issues etc. should not be there with the target company. Such operating issues may be a backlog for the acquiring company.
- Expandable Margins
A target company should be profitable in business terms to the acquiring company. If not profit, the target company should have potential for the business in future. The synergy from acquisition should have increased the margin by improving economies of scale, operation, finances and other functional areas. There should be something complementing with target companies which can provide additional benefit to the company.
- Liquidity Position
Liquidity position generally reflects the short term position of the business. Also, liquidity position reflects the ability to business operation and the potential of generating profit. While assessing a target bank, it is essential to check the liquidity position of the target company. Liquid position signifies the efficiency of the company towards its short term obligation which in turn reflects the long term ability of the company.
- Solid Distribution Network
Most of the acquisitions are done to integrate their business especially their distribution line. Therefore, a target company is a good target when it complements the service or product or any business channel of the acquirer. Generally, the target company adds value in distribution network of acquirer company.