By Colin O’Donnell
M&A Director
Mergers and Acquisitions (M&A) can be a valuable strategy for companies to achieve their growth objectives, expand their market share, and increase profitability. In 2022, M&A deals were nine percent higher than deal transaction volume in the previous period. While market concerns loomed in 2022, deal flow increased. But a company’s growth objectives can only be realized by identifying the right M&A target that has the potential to generate significant value for the acquirer. This begs the question: when might a customer be a good M&A target?
Strategic Fit
One key factor to consider when identifying a potential M&A target is the strategic fit of the target with the parent company. A business must identify a target company that complements its goals, capabilities and strengths. The target company should align with the organization’s mission and strategic vision, and the acquisition should be a logical extension of the acquirer company’s core business. Additionally, a strategic M&A can result in shared markets, complementary products or services, similar customer bases, or synergies in operations or technologies. The acquiring company can gain new capabilities, expand its market reach, or achieve operational efficiencies, which can further company advancement, nurture company vision, and increase stakeholder value.
Financial Performance
Another important factor to consider when identifying a good M&A target is the financial performance of the target company. Their financial metrics should be evaluated to determine revenue growth, profitability and cash flow. Balance sheets should be assessed to determine their financial health, liquidity and debt levels. A healthy financial target may provide a quick path to revenue and increased profitability for its acquiring company, and it may also offer economies of scale or cost synergies that can cut down the acquirer’s costs and improve profit margins. By targeting companies with strong financial performance, acquirers can leverage their existing strengths and capabilities to create a more profitable and sustainable business.
Market Position
Targeting a company with a strong market position is also an important consideration. The acquirer should look for a target company with a dominant market share, a competitive landscape, and growth potential. This type of target may have a well-established brand, customer base, or distribution network that can be leveraged to drive expansion and profitability. Additionally, a target with a strong market position may be able to withstand market turbulence and economic downturns better than its business rivals, making it a more stable and predictable investment. By targeting a company with a strong market position, acquirers can gain access to new markets, customers, and capabilities that can support notable expansion.
Intellectual Property and Innovation
Intellectual property (IP) and innovation are critical assets that can provide a remarkable, strategic advantage to a company. The target company should have a strong IP portfolio and a track record of innovation, which can help the acquirer stand out in their field. The target company’s IP portfolio may include patents, trademarks, copyrights, and trade secrets. Not only does an IP portfolio provide legal protection over its work product, but a company with a strong track record of innovation may have a pipeline of new products or services that can cultivate product and service enhancement and differentiation. By acquiring a company with a strong IP portfolio and innovation capabilities, acquirers can gain access to new technologies, patents, and research and development capabilities, which can help them advance beyond their competition and enhance their market position.
Operational Efficiency
Operational efficiency is another critical factor to consider when identifying a good M&A target. A company with a strong operational track record and efficient business processes can offer notable cost and productivity advantages to potential acquirers. The acquirer should evaluate the target company’s operational processes and systems, including supply chain management, manufacturing, distribution, and customer service. The target should operate efficiently, proving to be a nimble and responsive organization that can adapt to changing market conditions and customer needs. The target company should have strong, systematic, and effective operations that can be leveraged by the acquirer to gain access to new processes, technologies, and capabilities resulting in cost savings, improved productivity, and improved industry visibility.
Cultural Fit
Finally, cultural fit is critical to examine when considering to acquire or merge with another company. The culture of a company can be an important determinant of its success or failure and integrating two companies with vastly different cultures can be a serious challenge. The target company’s organizational culture, values, and management style should be evaluated. Their culture should be compatible with that of the acquirer, reducing the likelihood of consequential cultural clashes that could undermine the success of the transaction. A target company with such a culture clash may require considerable investment in change management, communication, and employee engagement to ensure a smooth transition. By prioritizing cultural fit, acquirers can reduce the risk of employee turnover, minimize disruptions to the business, and create a more cohesive and aligned organization.
Identifying a good M&A target requires a comprehensive evaluation of various factors, including strategic fit, financial performance, market position, intellectual property and innovation, operational efficiency, and cultural fit. By carefully conducting thorough due diligence and assessing potential risks, companies can identify a target company that has the potential to generate significant value and help them achieve their growth objectives.
Gertsburg Licata understands business expansion inside and out. Call us at (216) 573-6000 or complete our contact form to schedule a consultation with one of our M&A professionals.
Colin O’Donnell is Director of Mergers & Acquisitions for Gertsburg Licata Acquisitions. He can be reached at [email protected] or (216) 573-6000 x 8100.
