How to Build a Target List for Buy-Side M&A

Acquiring a company is no walk in the park. Risks abound. The following presents a great rank and outline for building a potential target acquisition list when engaging in buy-side M&A. This is a bit of an oversimplified and general outline (it doesn’t even include internal vs. external assets and capabilities), but the overall exercise of finding, contacting and filtering potential targets is an exercise that requires more care than most would-be acquirers realize. Luckily, today’s big-data resources provide an excellent tool kit for building a high quality list quickly and efficiently.

Horizontal Integration — When a company looks to integrate, acquire and grow horizontally they typically are not looking far outside the schoolyard. For instance, horizontal integration involves principal industry and geographic markets to which the acquirer has an existing understanding. This could be an area where existing product lines or services already exist. As the acquirer seeking a target, they likely already have a good read on the closest competitors or likely acquirers they would love to own within said niche. They will also either already know (or need to know very soon) the market share of each of said competitors. Understanding the market growth in the given sector is also a must.

Market Extension — The next step of determining fit is to target all the eventual or desired geographic markets you may wish to enter. Rank each by their appropriate fit or “desire” from most desirable to least. Where possible, it is helpful to gauge the potential market penetration that could occur by acquisition vs. organic penetration if the company were to enter each of these new geographic markets by buying instead of building. Doing so can also help determine the “desire” rankings from say one to ten, if appropriate.

Vertical Backward Integration — Here’s a great breakdown to understand the nomenclature for both vertical “backward’ and vertical “forward” integration. If you wish to integrate in reverse, look at yours and others’ suppliers in the industry, make assessments and find a way to extend and add to your revenue by creating synergies via acquisition of suppliers backward to you down the chain of command.

Vertical Forward Integration — Similarly, looking forward a direct assessment will need to take place of customers. This will include a detailed look at how customers might be acquired by industry or individually. This is especially helpful to view this type of integration or acquisition activity when individual or industry customers are large and another market leader could hold the proverbial “keys to the kingdom.” Buyer beware: smaller acquisitions to acquire larger customers can potentially include customer diversification issues within the target firm. A discount on the company valuation is certainly warranted in this case.

Product/Service Extension — By making a detailed list of all the possible products or services that could extend the current internal product/service mix a buyer may get a great quick view of opportunities for upsell, cross-sell and add via acquisition of a strategic target. These are often best acquired within the existing geographic territory, making integration that much simpler. Another way to frame the search is, “what do our current customers purchase from others (including our competitors) that our company could supply if we had access to the product or service?”

Free-Form Acquisition — Free-form diversification and acquisition involves entering a market or field where no current activity currently exists–geographically or otherwise. In essence, it’s everything that doesn’t fit from the assessment made from 1 through 5 above. It may include a geographic location with no present operations but also a market where the buyer has little to no expertise. Of all those listed, these targets will be the most risky. However, free-form targets should still be included in the overall M&A list.

While it’s tempting to filter out targets that don’t immediately meet your parameters of a good buy, it’s best to continue the acquisition search process with the entire list in mind. Let the individual growth needs and fit speak for itself as the process works through. Acquirers are often even surprised by some of the free-form targets that end up having more fit, synergies and reduced risk than originally anticipated from their initial assessment. It is also helpful to rank each of the aforementioned by several qualitative and quantitative parameters, giving the buyer an even more granular look at which targets may make the very best fit. Remember, that culture and the “soft” components of a deal will trump the data nearly every day of the week. It goes without saying that an advisor is an absolutely necessary evil (or blessing) when it comes to searching and executing on buy-side mergers and acquisitions.

Nate Nead on LinkedinNate Nead on Twitter
Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
  • Brian Haynes
    Posted at 14:11h, 23 September Reply

    great article

    • Nate Nead
      Posted at 03:28h, 24 September Reply

      Thank you Brian.

  • Peter Bell
    Posted at 18:36h, 24 November Reply

    Great insight Nate.

    Makes me rethink the execution of the buy-side process. From an analyst’s perspective, my first inclination is to do geographic market research in order to first nail down what region or market the client wants to enter. However, as you brought up, this can lead to a smaller list that could be missing key buyers right from the start. It’s crucial to start with horizontal integration as it provides the acquirer with a thorough understanding of the principal industry and geographic markets, before a specific market is nailed down.

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