Mergers and acquisitions (M&A) help shape the business world. Companies keep eyeing opportunities for growth and expansion. M&A deals can also improve existing operations.
You can find a lot about the inner workings of M&A online. However, investors often overlook this question — Why and how do companies become targets for acquisition in the first place?
In this blog post, we will delve into target firms. You’ll see how they’ve evolved, along with the strategic and tactical moves involved in their acquisition.
Understanding Target Firms
Companies can become target firms for many reasons. These factors contribute to their desirability in the eyes of potential acquirers.
Target Firms Often Present Opportunities Like:
- Access to New Markets: Target firms can have established footholds in markets that the acquiring company seeks to enter.
- New Products and Diversification: Acquiring a target firm can be a strategic move to diversify product portfolios and enhance innovation.
- Increased Profits: Companies with a proven track record of profitability attract attention due to their potential for immediate financial gains.
- Reduce Competition: Acquisitions can reduce competition, consolidating market share and enhancing overall industry influence.
Takeover Premium
The desirability of target companies often results in acquisitions at a premium. Companies will pay above the current market value. A takeover premium is a financial indicator that can show strategic value to the acquirer. This is often rooted in the perceived benefits of the acquisition.
Target Firm’s Role in M&A Strategies
Target firms play a pivotal role in shaping M&A strategies and deals. They can offer a range of advantages for the acquiring companies.
Common Reasons for Acquisitions:
- Boosting Profits: The integration of successful target firms can lead to immediate boosts in overall profits. This cashflow can help with other business operations.
- Accessing New Markets: Acquiring a target firm allows the acquirer to enter new markets, leveraging the established presence of the target.
- Gaining Market Share: Merging with a target company can lead to big increases in market share. This can enhance the acquirer’s competitive position and improve economies of scale.
- Tech and Intellectual Property: In the age of rapid technological advancements, acquiring target firms can provide access to cutting-edge technology and valuable intellectual property.
- Talent Acquisition: Skilled workers within the target firm can be a valuable asset for the acquiring company.
- Brand Enhancement: If the target firm boasts a strong brand reputation, the acquisition can enhance the acquirer’s brand image and customer loyalty.
New Technology is Improving Decision and Transactions
The integration of emerging technologies, such as 5G, AI, and blockchain, further amplifies the strategic value of target firms. These technologies can enhance the decision-making process and empower acquirers with more data than ever before.
- Provide Competitive Advantage: Integration of emerging tech can result in a higher valuation for the target firm, providing a competitive edge in the market.
- Create New Business Models: Technological advancements can enable the creation of innovative business models and new revenue streams.
- Increase Efficiency: Tech integration can enhance overall efficiency throughout the acquisition process, from due diligence to post-merger integration.
- Improve Data Analysis: Advanced technologies can help with making more informed decisions through improved data analysis.
Target Firm Resistance Tactics
Some founders build their companies with an end goal of being acquired. But no matter the early goals, any company might get acquisition offers. For the most part, having an offer is taken well — but some publicly traded companies don’t want to be bought out, and they’ll go to extreme lengths to avoid it (privately held companies can just simply say no to the offer).
Common Resistance Methods
- Poison Pill: Target issues new shares or rights to existing shareholders at a discounted price. This can make a hostile takeover financially unattractive. You can see a high-profile example of this in Netflix’s 2012 poison pill approach to avoid acquisition.
- Crown Jewel: Selling off key assets to a third party reduces the target’s overall value, making acquisition less appealing.
- Litigation: Filing lawsuits can challenge the legality of the takeover bid, introducing delays and increasing legal costs for the acquirer.
- Share Repurchase: Target firms may repurchase their own shares, increasing acquisition costs and limiting available shares for the acquirer.
- Employee Retention: Offering incentives to retain key employees can complicate the integration process, making it more challenging for the acquirer.
Conclusion
Let’s briefly recap and get the gist on target firms.
- Target firms are companies that have made themselves desirable acquisition targets. This can be for a wide range of reasons.
- Target firms represent opportunity for the potential acquirer aiming to pursue them. They can provide strategic advantages to improve and expand business.
- Not all target firms want to be acquired, and some will go to extreme defensive lengths to avoid it.
We hope that you’ve found this article valuable when it comes to learning about target companies and what makes them desirable. If you’re interested in reading more, please subscribe below to get alerted of new articles as we write them.
Meanwhile, we’re also on standby to assist with any M&A-related ventures. Are you currently working on a deal or might be soon? The world of M&A is a complex one, and having a world-class advisory group of experts on your team is often the key to a successful deal.
