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Finance Series: corporate-finance

What makes a company an attractive M&A target?

Can an analysis of financial measures, such as growth, profitability, leverage, size, liquidity and valuation provide insights into which companies are likely to become acquisition targets?

Author(s): Scott Moeller - Cass Business School; Dr Valeriya Vitkova - Cass Business School;

How do these measures differ for private vs. public targets? What is the relative importance of these measures in predicting the probability of a company becoming an acquisition target? Intralinks, the global technology provider, and Cass Business School performed a study which seeks to answer these questions. The study, The Attractive M&A Targets Report, reveals how the financial characteristics of companies correlate with merger and acquisition (M&A) activity in often unexpected ways. The study's findings carry important implications for a number of different market players such as: a) investors who seek to identify companies which are potential M&A targets; b) companies who seek to retain their independence but have the characteristics of attractive M&A targets; c) potential acquirers who seek to identify companies that could or should be relatively easier to buy.

This study investigates six key financial measures of a global sample of 33,952 public and private companies, over the period 1992-2014. We find that these six measures are statistically significant predictors of a company becoming an acquisition target. We also find that significant differences in the values of these measures affect the relative likelihood of being acquired. According to our analysis, acquisition targets share the following characteristics:

GROWTH: Target companies have higher growth than non-targets. Our study finds that growth, as measured by the 3-year compound annual growth (CAGR) in sales, of target companies is 2.4 percentage points higher than that of non-targets. Private companies in the top or bottom deciles for growth are on average 24% more likely to become an acquisition target in any given year than private companies overall. Public companies in the top or bottom deciles for growth are on average 21% more likely to become an acquisition target in any given year than public companies overall.

PROFITABILITY: Private target companies are more profitable than private non-targets, whereas public target companies are less profitable than public non-targets. Private companies in the top or bottom deciles for profitability have on average a 20% probability of being an acquisition target in any given year - 39% more likely than private companies overall. Public companies in the bottom two deciles for profitability are on average 40% more likely to become an acquisition target in any given year than public companies overall.

LEVERAGE: Private target companies are significantly more leveraged than private non-targets. Public targets have lower levels of leverage than public non-targets, especially since 2008. Private target companies have over 3 times as much leverage, as measured by their debt/EBITDA ratio, as private non-targets. In addition, private companies in the top two deciles for leverage have on average a 28% chance of being an acquisition target in any given year - twice as likely as private companies overall. Since 2008, public targets have 11% less leverage than public non-targets. Public companies in the bottom two deciles for leverage are on average 30% more likely to become an acquisition target in any given year than public companies overall.

SIZE: Private target companies are significantly larger than private non-targets, whereas public targets are significantly smaller than public non-targets. Public companies are increasingly more likely to become acquisition targets, the smaller than the average they are. Private targets are 70% larger, as measured by total sales, than private non-targets. Private companies in the top or bottom deciles for sales are on average 28% more likely to become an acquisition target in any given year than private companies overall. Public targets are 55% smaller than public non-targets. Public companies in the bottom half of the percentile distribution for sales are on average almost 70% more likely to become an acquisition target in any given year than public companies in the top half.

LIQUIDITY: Target companies have lower levels of liquidity than non-targets. Liquidity, as measured by current assets/current liabilities, of target companies is 4% lower than that of non-targets. Companies in the bottom two deciles for liquidity are on average 35% more likely to become an acquisition target in any given year than companies overall.

VALUATION: Public target companies have lower valuation multiples than public non-targets. Public target companies are valued at a 17% discount to public non-targets, as measured by enterprise value (EV)/EBITDA. Public companies in the bottom three deciles for valuation are on average 30% more likely to become an acquisition target in any given year than public companies overall.

Download the report - The Attractive M&A Targets Report

The Cass M&A Research Centre (MARC), founded in 2008, is the only research centre at any major business school focused on both the research and practice of M&A.

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