What makes a company an attractive acquisition target?

1 November 2017

Intralinks have teamed up with the Cass Business School of London to identify the key financial measures that make companies attractive acquisition targets.  The research, ‘Attractive M&A Targets: Part 1—What do buyers look for?’ looked at 33,952 private and public companies with annual revenues to establish six key financial indicators that are statistically proven predictors of companies becoming targets.

1. Growth

Companies with significantly higher or lower levels of growth (measured by their three-year compound annual growth rate in sales) than the average are the most likely to become acquisition targets.

2. Profitability

Private companies with much higher or much lower profitability (measured by their ratio of earnings before interest, tax, depreciation and amortization [EBITDA] to sales) than the average are the most likely to become targets, whereas public companies with much lower profitability than the average are more likely to become targets.

3. Leverage

Private target companies are significantly more leveraged than private non-targets. Public targets have lower levels of leverage than public non-targets, especially since 2008. Private target companies have over three times as much leverage, as measured by their debt/EBITDA ratio, as private non-targets. Since 2008, public targets have 11% less leverage than public non-targets. Public companies in the bottom two deciles for leverage are on average 30% more likely to become an acquisition target in any given year than public companies overall.

4. Size

Private target companies are significantly larger than private non-targets, unlike public targets which are significantly smaller than public non-targets. Public companies are increasingly more likely to become acquisition targets, the smaller than the average they are.

5. Liquidity

Target companies have lower levels of liquidity than non-targets. Liquidity, as measured by current assets/current liabilities, of target companies is 4% lower than that of non-targets.

6. Valuation

Public target companies have lower valuation multiples than public non-targets. Public companies in the bottom three deciles for valuation are on average 30% more likely to become an acquisition target in any given year than public companies overall.

It’s clear from the research that buyers are looking for significantly different things when it comes to private versus public companies.  Underperforming public companies are the preferred option for acquirers, as they are more likely contenders for operational improvements and cost savings.

Should you have any questions about this blog, or are considering your options when it comes to a company sale, please do not hesitate to contact me or your local corporate finance specialist.