Acquisitions are a common strategy for corporate growth, but finding the most suitable companies for acquisition is often easier said than done. What sets apart successful acquirers from those that are ineffective? Their continual focus is on identifying acquisition opportunities.
Why Your Company Should Build an Acquisition Pipeline
Building a solid acquisition pipeline—a list of companies recognized as potential acquisition targets—is often the first step to driving inorganic growth for the acquiring company. For companies seeking to incorporate mergers and acquisitions into their corporate strategy, maintaining an active acquisition pipeline means continually sourcing and qualifying potential companies as suitable targets.
If your company is considering whether to pursue a more consistent flow of potential acquisitions, consider the following benefits of adjusting your corporate strategy to take advantage of an active acquisition pipeline:
- Higher-quality deals. An actively managed acquisition pipeline will provide your company with access to proprietary deal flow, locating companies that are not actively marketed as “for sale.” Without a pipeline in place, acquisition opportunities arrive only from investment bankers who represent a company in a formal sale process. Banker-represented deals often sell for a premium compared to unrepresented deals because the selling company is marketed to competitive buyers, often driving up the price. By targeting unrepresented companies, your company will face less competition, avoid a bidding war, and move quickly when the right opportunity presents itself.
- A focused process. Today, most large corporations have a corporate development department that focuses primarily on M&A strategy; others outsource to an investment banking advisor who manages the acquisition process. Either way, management is free to concentrate on operating the business while a dedicated team handles the screening and qualification of targets. This vetting process ensures that the targets presented as potential opportunities are of the highest quality. Plus, corporate development directors and investment bankers are transactional experts who can efficiently plan and execute your company’s acquisition strategy.
- A range of options. For a transaction to close successfully, many moving parts must align. The “perfect” target may not be interested in selling or may have unrealistic valuation expectations. Therefore, targeting multiple companies simultaneously creates more options and increases the likelihood of finding the right fit for the acquiring company. Having options will provide your company with more leverage when negotiating with a potential seller because you’re not putting all your eggs in one basket. Furthermore, analyzing your entire range of options will leave you more knowledgeable about the market and all the available companies, which is also helpful when negotiating.
Once you’ve determined that your company is ready and eager to improve its acquisition pipeline, it’s important to follow a blueprint that is tried and tested—a practical, effective, and systematic approach to identifying acquisitions in a way that will enhance your corporate strategy for growth.
Develop Your Acquisition Strategy
Acquisitions should not be made merely for the sake of making a deal. An acquisition generates the most value when the transaction thesis is developed and sound, but for your acquisition strategy to be successful, it must also be flexible enough to adapt to changes in your business.
Your company’s management must analyze your business and seek input from department heads to identify which segments would benefit most from inorganic growth. Start by considering the following points:
- Motivation for acquisition. What is the value added by acquiring this company?
- Increase footprint
- Diversify product or service lines
- Accelerate growth
- Remove competitors (increase market share)
- Acquire expertise or technology
- Create synergistic cost savings (economies of scale)
- Type of acquisition. Is your purpose for acquisition related to tweaking your value supply chain, expanding your offerings, or something else?
- Vertical acquisition
- Horizontal acquisition
- Conglomerate merger
- Market/industry assessment. How will current market conditions impact an acquisition right now?
- Industry M&A volume
- Recent transaction multiples
An acquisition pipeline process that is systematic and focused on your corporate goals will help inform the appropriate strategy for your company.
Focus Your Process
As an acquiring company, you may be looking for acquisitions in multiple industries or sectors, so determining the key attributes of your ideal target will be critical to setting a benchmark. Management should decide how to prioritize the target criteria, which should be directly related to your strategy and your available resources. After identifying specific industries and types of companies as potential targets, set parameters such as geography, size, intellectual property, capabilities, etc. Then take time to research, identify, and vet companies systematically while focusing on your established priorities.
Find Acquisition Targets
Locating the right target opportunities for your company is one of the more challenging phases of building an acquisition pipeline; it’s an art as much as a science. As discussed earlier, however, the payoff can be worth it: one massive benefit of this process is identifying companies that are not actively being marketed. Capital market databases and private dealmaking platforms can unearth information on privately-owned companies. Having robust industry connections also helps identify specific competitors or vendors that would be strong targets; investment bankers can significantly augment this phase of the process by offering access to a broad network of business owners and advisors.
Once you’ve identified your target companies, qualify them by reviewing publicly available information to verify their geography, business model, revenue, ownership, etc. Even a potential target that doesn’t meet all your criteria may still be worth considering because not all the available information may be accurate. Sometimes it takes an initial phone to learn whether it could be a good fit.
Reach Out To Targets
Now that you’ve amassed a list of qualified targets, management should review them and decide which to contact. This initial outreach is a high-level conversation for our company and the potential target to learn more about each other and see whether your goals may be aligned. After all, not all business owners are sellers, and some may even fail to respond to your inquiries.
During this initial outreach, you will provide background on your company and your interest in the business as a potential acquisition. However, sellers are often hesitant to provide private details about their business and operations, so if there is mutual interest in continuing the conversation, signing a nondisclosure agreement would keep any shared information confidential.
Repeat the Process
Maintaining a functional acquisition pipeline means searching for acquisition target opportunities not just once but continually. The most efficient strategy for your company would involve a constant process of simultaneously identifying new opportunities, reaching out to approved targets, and gathering information from interested targets.
A solid acquisition pipeline can be an essential tool to drive inorganic growth for your company, but your pipeline is only as strong as your corporate strategy. By assembling a dedicated team focused on producing acquisition target opportunities, your company can build a strategy that complements your other business operations. And implementing this systematic acquisition pipeline process to support your corporate goals will increase your odds of finding a quality target for a successful transaction.