Filtering for an Acquisition Target
Hello everyone,
I'm in business school and I'm taking an M&A course this semester. The professor has the course organized so that we choose an acquisition target and model it out over the course of the semester. At the end we pitch the acquisition and the class votes on whether or not to approve the purchase. I should also mention that my project will be from a corporate development point of view as opposed to a private equity/venture capital one.
I don't know much at all about M&A, so I was hoping to get some advice on searching for a good target. We haven't learned much in the course yet, but we need to settle on a target by next week. I have access to a Bloomberg terminal, so I was hoping that I could use it to filter out a list of equities that fit a set of criteria. Here is what I have so far:
- Revenue below $1B (project requirement)
- Relatively low D/E ratio (to make an LBO more feasible???)
- Low EV/EBITDA (relative to some industry average/median)
- Healthy EBITDA Margin
- Consistent Free Cash Flow
I've heard that this professor is a savage with grading, so I really want to make sure that I set myself up for success with the target company. I also realize that I may be thinking about this completely wrong and maybe filtering like this isn't a great approach. I really am open to any industry, which is why I'm not sure how to start the search. Any advice at all would be greatly appreciated, thanks.
Without any more information, I would say you might be thinking about this the wrong way. Rather just filtering down financial metrics I would look at it from a strategic perspective. Is there an area where your firms capabilities may be lacking? What acquisitions have direct competitors made?
Once you figure out the strategic rationale you can use the metrics you outlined above as a way to filter down and find the target best suited to the strategic profile.
From a modeling perspective try and think about it in terms of cost synergies and revenue synergies.
This definitely makes sense. The only issue is that we have to pick the parent company as well, so it's difficult to think about strategy before having a company or industry in mind.
It for sure makes more sense to look at this strategically before filtering by financials, so thanks for the reply.
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