How to determine if a company has good potential for acquisition?
Hey guys, I'm an undergrad currently working as an intern in an firm that provides M&A advisory services to select clients, and I've been assigned a task to locate potential acquisition targets in the Southeast Asian market for a client.
Now, I understand that there are different criteria that different firms are looking for when acquiring, but are there general metrics to look out for when scouting for such opportunities? I'm asking because I am very much a newbie to such screening practices, and I really am unsure what to look out for. I've googled quite a bit, and generally what I've gathered are characteristics of potential acquisitions are:
- High FCF but no proper usage of cash (e.g. expansion, R&D etc)
- Experienced management (might contradict point above, but not always)
- Expandable margins
Advice needed urgently! Thanks!
Find a company that everyone says has great assets that are poorly run/poorly managed. That's almost always a company that makes a good potential takeover target.
They also have to be acquirable. As in you can't have an unwilling seller, and they can't be too large. BP would make a great takeover target, but they're a little too big.
synergies
LOL synergies is the answer to just about every M&A question, but those are tougher to figure out on the first pass than management if the company doesn't already have a target in mind.
@BTbanker @IP Synergies, yes definitely, but as said, it's hard to figure out probable synergies stemming from acquisitions. I'm using financial ratios to determine profitability, efficiency, can someone tell me if I'm doing it correctly?
Is this for a PE firm looking to make a new investment or a corporate client looking to grow?
The latter. I identified a few key characteristics of companies that the acquirer is seeking in its aims, but I can't be certain it's correct.
I assume this is a fairly standard M&A book for a client-service meeting with a corporate, right?
Few suggestions (based on a generic meeting - obviously depends on what your client is looking for): 1. Industry: Look for companies in the same / adjacent industries for consolidation ideas but if your client has stated specific industries to expand into - obviously include those as well 2. Geography: Focus on companies operating in the target geography / countries 3. Size: Look for companies of similar size for transformational deals or within a certain smaller range for bolt-ons 4. Valuation: Look for companies trading at lower multiples where a deal could accretive 5. Leverage: Look for companies with too much debt which require equity-partners to grow / invest or which may divest parts of their business for your client to acquire 6. Financial Performance: Look at growth expectations, margins, FCF profile to determine if this would be helpful to your client's existing outlook - i.e. will it add to the growth profile, will it improve or dilute margins, etc. 7. Ownership: Have a look at the existing ownership structure as part of your review - if they are private, what are the intentions of the shareholders / family; if they are public, are there any key shareholders which will influence any discussion
If you are using a database like Capital IQ or FactSet, running screens based on these criteria should be a fairly straight-forward exercise.
Southeast Asia is experiencing capital flight at the moment, which will put an increasing liquidity squeeze on a lot of companies who have borrowed too much over the last few years. Indonesia is particularly fucked. This means you'll have quite a few desperate sellers.
Start by screening listed companies in Indonesia, Malaysia, Singapore and Thailand which have too much leverage. Debt to EBITDA multiples are the most common way to do this. You want to find businesses which are decent, but overlevered. You can then look at buying out the company or, if it's a big conglomerate, buying out a subsidiary/business division.
Extra info - Philippines is also Southeast Asia, but is the stand out among Southeast Asia for being a developing economy that is not looking really fucked at the moment. Put them in your screen as well.
Key point that won't show up in your screen is what family/families are sitting behind the companies your target produces. In Indonesia and Philippines particularly, there are a few families who control a lot of the economy. Doing a deal involves a lot of ensuring you've got the incentives lined up right, which usually means the family stays in for a significant stake. A foreigner coming in for a 100% acquisition is (a) often not legally possible, due to local shareholder requirements (eg Indonesia, Thailand from memory) and (b) a recipe for the foreigner getting done over, because they find the family behind the company happily sells it, takes the cash and then some vital part of the business (eg supply contracts) suddenly become a lot more expensive as the company has been extracted from the family's conglomerate eco-system.
If your shop doesn't have people on the ground who know the eco-system, then it's questionable why your clients would even bother (although makes sense for your shop as you can collect the fee and leave your client to sort out the mess). If you do have people on the ground, then fuck the Factset/Bloomberg screening process, get them on the phone and doing their relationship work by finding out what's potentially up for sale.
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