Right Target - Right Price
The First Decision Can Be the Most Important: Whom to Acquire/ Invest Into? Treat Price and Strategy as Related Elements.
by Terry Stidham, Target Search Group
RIGHT TARGET: The first decision in an acquisition/ investment
can be the most important: Whom to acquire or invest into? Going down a road after the wrong
target can be a significant drain on organizational resources even if a deal
never takes place. If you do commit, a false step can stick with you for a long
time.
Even worse, you may miss a
universe of opportunities that were closer fits in the first place.
Get your senior
team aligned on the strategic criteria that matter most to you. Then develop a
long list of relevant prospects and filter that list to create a short list of
priority targets. That sounds easy, but those filters are choices that
represent your strategy. At the outset, there’s little risk in considering too
many targets.
RIGHT PRICE: Of course, the often most
important near-term criterion is the price you’ll pay. Whether financed by cash
or leverage, it should compare favorably to your anticipated return. If
operating across borders, currency questions apply at the time of sale and later
on when you’ll be trying to realize the value you sought in the first place.
It’s important to treat price
and strategy as related elements.
Due diligence is critical, and
your CFO will be at center stage – not only to help analyze the assumptions behind
the initial transaction but also to help preserve and create value as the new
entity moves forward. A “good” price for an investment that doesn’t advance
your enterprise goals may turn out to be wasted money and a distraction from
your strategy.
QUESTIONS TO ADDRESS:
- What are your chief acquisition/ investment criteria:
- Sustained earnings
- Presence in a certain market or geography
- Ownership of intellectual property
- New products or something else?
- What are the specific deal issues that can have the biggest impact on valuation and return?
- Will the target require a cash infusion to operate even after you’ve paid to own it? Will that add to your debt load?
- Who else is competing to acquire your target? Do you have alternatives?
- What cultural issues will influence your post-merger operations?
- Are your accountants and theirs able to work together?
- What do you know about the people behind the brand you’re thinking of acquiring?
ABSOLUTES AND DEAL BREAKERS: Your senior team should be
aligned on strategic priorities for M&A. Write down five criteria your
acquisition should satisfy to be worthwhile in your eyes. Then write down five
deal breakers that may likely disqualify a target, no matter how attractive in
other ways.
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