How to Identify the Best Acquisition Targets: A Guide to Target Screening in M&A

One critical component that often gets overlooked in the M&A process, but which can make all the difference, is target screening. Target screening involves thoroughly analyzing potential acquisition targets to determine whether they align with your company's strategic goals, financial objectives, and culture. It may seem like a tedious process, but the benefits of effective target screening are immense, from reducing the risk of a bad acquisition to maximising the odds for long-term success from M&A.  

The screening process applies a set of criteria to screen for candidates that will best support your M&A (and corporate) strategy. It is a systematic approach to identifying the most suitable candidates through an iterative process. Proper target screening lays the foundation for successful deal execution and integration.

Define Target Screening Criteria  

The criteria used for screening should be developed based on your M&A strategic objectives. As screening criteria are defined, you should spend time prioritising them. By going through such an exercise, you will establish a clear view of the benefits it plans to achieve through acquisition.

• Affordable price range - i.e., determine how much you can afford to spend on an acquisition
• Size range preferences - i.e., determine the desired size of potential acquisition targets in terms of market capitalisation, revenues, net asset values, etc.
• Profitability requirements - i.e., determine EBITDA/EBIT, net margin and free cashflows requirements
• Shareholding preferences - i.e., determine the desired level of control over the target and define separate criteria for a majority or a minority shareholding
• Transaction structure preferences - i.e., acquisition of shares vs assets and special acquisition vehicles
• Management team requirements - i.e., take into consideration leadership style, expertise, receptivity to change, compatibility of culture, and modality of management after the completion of the transaction

In addition, you should define a set of operations-related criteria. This should include establishing:

• Marketing criteria in terms of product lines, customer base, brand reputation, geographic presence, distribution channels
• R&D requirements, such as licenses, patents, R&D centers, product pipeline, R&D expenses, etc.
• Production criteria, such as facilities, labor supply, production techniques and capacity

The following dimensions should also be analysed when considering the quality of an acquisition target:

• Strategic fit and the M&A dimension” being fulfilled (See Ansoff’s Matrix)
• Product/Service fit
• Reasons to acquire
• Company turnover and profitability
• Integration complexity – e.g., consider culture, locations, complexity of producer/service offering and whether the target can be integrated into existing operations and culture
• Future growth expectations
• Expected synergies and potential for long-term value creation
• Feasibility – i.e., general perceived ease of getting the deal done
• Is the timing optimal to pursue a target?

Short-listed targets should be further screened to determine:

• Their fit into your organisation’s current business portfolio
• Their competitive position and future prospects
• The long-term value they could create for the organisation

NOTE: typically, at this stage in the M&A lifecycle, you will be screening targets based on information available in the public domain – so don’t expect to find all the answers you need.

By approaching the screening process proactively, you can establish and maintain a competitive position by being first to engage, by being more informed, and by being prepared to move on a deal more quickly.

Develop Target Profiles

Once the final list of potential targets has been refined, it is critical to develop a profile representing each of the candidates. Target profiles of short-listed candidates will be the basis for prioritising targets - determining which targets to pursue and in what order. These profiles can range from a page to several pages in length depending on the needs of the company. Some aspects of these profiles may include:

• Company overview and history
• Business strategy of the target
• Product summaries/assessment analysis
• Major news announcements
• Customer data (as available)
• Consolidated financial data
• Regional/international benchmarked performance data
• Culture - conduct research on Glassdoor and other social media platforms to see what employees say about their employers
• Ownership structure
• Management team background
• Competitive position
• Segment trends
• Integration options available: absorb, maintain on stand-alone basis, or partially absorb
• List of subsidiaries, affiliates, properties, directors, and executives

With these profiles in hand, decision makers have enough information to make an initial approach to an M&A target. While profiles should not be considered sufficient due diligence to move forward with a transaction, they do provide a good summary to begin the process.

Rejecting M&A Targets – “go/no-go”

Go/no go decisions are typically the checkpoints/gates in the target screening process. There may be multiple go/no go decision points across the M&A lifecycle depending on the size of the potential acquisition, and your corporate governance rules.

Potential reasons to eliminate a target from the M&A pipeline/end screening include:  

• Price expectations of the target
• Lack of adequate data (for example in an auction deal);
• Anticipating difficulties in financing the deal (potentially due to price expectations of the target)
• Shortage of deal negotiation resources
• Unexpected changes in the market, technology, or financing rules
• Anticipated hurdles across the integration process
• Insufficient synergy opportunities to support the business case
• Wrong product/service offering or geography

Target Screening: Tips & Warnings

• Develop clear inclusion/exclusion and prioritisation criteria and apply the criteria with rigour to narrow the scope of potential targets – this will support the preliminary due diligence stage
• Be sure to update your screening criteria on an ongoing basis to reflect, for instance, ongoing changes in corporate strategy and the marketplace.
• Consider the quality of the information on which you are basing decisions.
• While difficult to understand in the early stages of target screening, don’t ignore culture.
• Don’t deviate from your screening criteria without good reason and without agreement from the rest of the team (if you need to deviate then it’s likely that your screening criteria should be re-evaluated).
• Don’t shortlist a target as being suitable (when it’s not) just because you “like it” – rather, put it on a list to revisit in the future should things change.

About the Author

Tom is the CEO of Navima. Prior to Navima, Tom worked at 2 M&A boutiques (leading acquisitions, divestments, strategy and venture projects) and was Head of M&A & Corporate Development for a fast-growth, VC backed SaaS company. Tom has supported companies around the world including Shell, Unilever, Philips and the Big Four with improving their M&A process and leading the development of playbooks.