A company may choose to enter an M&A environment by identifying a potential target i.e., a company of interest, due to its future prospects of revenue growth, geographical distribution or synergies with the acquiring company.
However, even though a target may seem attractive at first glance, it is imperative that a thorough investigation be conducted before sealing the deal and investing in any business operations with them. This assessment process is what is referred to as Target Screening and Assessment.
How is a target screening and assessment exercise conducted?
Ideally when performing a Target screening and Assessment investigation, three key aspects should be considered:
- The financial position and growth potential of the target
- The market position and competitive skill sets available with the target
- The managerial capability and human capital skills which exist in relation to these requirements.
During the early stages of investigation, details of the target company should be sought on the Internet and on its Annual Report. Using this information, some key points about the target company may be identified. These include:
- Its location, geographic distribution and customer base
- The management team that comprise this company
- The level of investment that has gone into its development
- The nature of its product ranges
- The number of employees and potential staff available to support future operations.
Once a thorough investigation is performed regarding the target company, it will be apparent if a beneficial transaction can be realised from it. This may be due to its financial condition, competitive ability compared to other companies, the possibility of a merger with another company, a takeover attempt by a larger corporation or a potential spin-off from one business segment into another.
It is imperative that the acquiring company identifies what products and services will actually be purchased from the target company within the acquisition process. This will then allow for an evaluation regarding whether or not such services and products will be viable in the short and long term. This is due to the fact that key competitive advantages of the target company may be lost after the acquisition.
It is also important for companies performing an investigation on potential targets to determine if they can actually assimilate these services performed by the target company into their own business model. This is due to external factors that may not be anticipated by either of the two companies. Such factors that may affect the future of any transaction between both parties include:
- The introduction of substitute products or services by competitors
- Changes in consumer tastes or preferences
- Long term technological advances or trends which are likely to affect investment decisions
- Changes in labour relations, employment agreements and employment laws.
Once these conditions are met, the next stage of the investigation must be to obtain more specific details on the financial position and future prospects of the target company. This will require due diligence about its assets, liabilities, equity and cash flow over a long period. It will also need to identify how it has performed in sales growth, profit maximisation, debt reduction and capital expenditure over this time period. For this reason, it is important for any acquiring company to include a detailed analysis of these factors when making an acquisition decision.
Target screening and assessment in mergers and acquisition (M&A) is the process of investigating companies before making an offer for one. Given that a lot of time and resources can be wasted acquiring companies that are not strategically aligned or which will not achieve the strategic goals of the acquirer, the process of target screening and assessment is critical to the success of a M&A exercise. It is therefore imperative that the process is carried out by someone knowledgeable in the issues concerning the business and adequately trained to carry out such analysis.
