Strategic Target Screening in M&A: When and How?

Acquisitions has been one of the major strategies for growth in several industries including pharmaceuticals and biotechnology. It is well-known that 3/4 of all acquisitions end up as failures. This article focuses on how to identify the right acquisition targets based on the company’s needs and future prospects. Before deciding to pursue an acquisition the potential acquirer needs to identify its weaknesses, whether these are linked to the motives of the acquisition and if so, how. Instead, if the company is trying to anticipate market or competitors’ moves target screening and selection should also be modified. Some conceptual and practical steps are discussed below:

Identify your Company’s Weaknesses

Before deciding to make an acquisition and justify the motive behind it, it necessary to perform an analysis to identify the weak spots of your company and which of the weakness you expect to improve through the acquisition. In general a company’s weakness can fall into the following categories:

  • Operational: Research, Development and Manufacturing
  • Financial: Low appreciation of capital markets towards your company (Stock price, expectations)
  • Market Access: Brand awareness as a marketing barrier to entry

Identify Motives & Criteria

A particularly important factor to consider is the acquirer’s motives and how these relate to improving the company’s weaknesses over the long- short or medium-term (assuming that is the aim for the acquisition/merger). These are the principal factors shaping the criteria for target screening. This relationship is illustrated in the table below:

Motives & Criteria

Motives & Criteria

Time factor refers to whether the motive for acquiring a company can cope with the acquirer’s weakness in the short-term, medium-term or long-term. There are also additional criteria that can make target screening proactive. This means that, If the acquirer is considering to acquire an early-or mid-stage firm it is important to search activity of the target firm in scientific conferences, intensity of scientific publications and in the scientific community in general.

Target Screening

Using the relevant criteria and motives it is possible to start screening attractive targets. In order to do that it is vital to gain access to a database or platform that incorporates the company descriptions, number of employees as well as companies’ financials.

  • OneSource: A multi-industry database that allows the subscriber to screen by SIC Code (or other codes), country or revenues. The main advantage of OneSource is that it includes millions of private companies across the world with accurate descriptions (http://www.onesource.com/corporate/)
  • Evaluatepharma: A pharmaceutical industry database. It incorporates historical data as well as forecasts, information about investors in the industry and data for sub-sectors (http://www.evaluategroup.com/Default.aspx)
  • Mergestat: A databases dedicated for providing with historical M&A data. With Mergestat one can search control premiums, past deal values and acquirers’/targets’ financials at the time of acquisition or merger. Useful for performing a comparable transactions valuation for potential targets (http://www.factset.com/data/factset_data/factsetmergers)

Next Steps

Once the target sample has been developed, the acquirer needs to conduct further research on the targets. That may include one or more of the following:

  • Indicative valuation of the targets’ intellectual property (e.g. patents) based on past transactions or historical growth of comparable companies, especially when it comes to early-stage firms
  • Contacting the targets’ executives
  • Contacting third parties (investment bankers, financial advisers)
  • Discuss about potential due diligence
  • Deciding on which targets would be easier to integrate, based on size, culture and expertise and how (absorption or preservation?) 

Conclusion

 Target screening is crucial as it determines on which target(s) the due diligence will be performed. This article integrates the motives and criteria for target screening, examples of appropriate online platforms as well as additional steps. Failing at developing a good target sample could lead to increased risk of an unsuccessful acquisition.

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