by Lauren Dever
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Bain & Company recently noted the shift taking place when acquirers identify and follow targets through their pipelines; namely, the lens through which a target is screened and reviewed has become wider.
The larger ecosystem of the economy, specific industry, and general M&A activity now all play a more integral role in target scoring (or target screening). Correspondingly, buy-side practitioners must remain more agile than they had to in the past. Below we discuss current trends related to target scoring, as well as target scoring best practices.6 Current Trends in Target Scoring:
- With a stronger emphasis on the pulse of the market, target scoring is turning into more of an “outside-in” philosophy than an “inside-out” one (focus on the acquirer).
- Dovetailing the “outside-in” approach is the continued necessity for the screening process, but the top of the funnel needs to begin broader, otherwise valuable opportunities can, and will, be missed.
- Acquirers should begin with a list of companies that generally meet their criteria. Keeping the overarching deal strategy and loose screening process in mind, then place an emphasis on 4-6 key metrics.
- Making use of a tool, such as an interactive, realtime dashboard, makes target scoring more methodical and efficient and tends to lead to more lucrative deals. More specifically, use a tool especially designed for the world of M&A.
- Operating a pipeline tool or M&A dashboard also makes it easier for Corporate Development to present on, and speak to, possible targets; this is increasingly important as company boards are becoming more and more active and vocal. A dashboard that updates in realtime and leverages visuals to clearly convey key metrics and analytics is essential to effective target sourcing.
- Moreover, a M&A platform with a focus on moving deals through the pipeline, as well as CRM for the initial courting stages and cultivating relationships, is extremely useful. Platforms, like Midaxo, also boast a robust mobile app, making CRM and target data collection easy on-the-go.
Target Scoring Best Practices:
- Establish a sound acquisition strategy — Adopting a broader focus and remaining Agile does not mean acquirers should abandon the need for a sound acquisition strategy. First, consider why inorganic growth is a better fit than organic growth at this point in time. Then, consider what specifically you are after…IP, exposure to new markets and securing new talent are just a few of the drivers behind an acquisition strategy.
- Screen target against a first layer of screening criteria — Remember to keep criteria fairly wide, yet clear; screening points may include market share, size, geography, customer segment, profitability, and synergies.
- Narrow down to a higher level of justification — Once beyond the initial screening layer, continue to narrow down the target focus, taking into account criteria such as post merger requirements.
- Be aware of common target red flags — Tax implications, possible litigations, unrealistic valuation and projections by the target itself, and health and environmental claims against the target are just some common red flags that can help you cross a potential target off your list.
- Target criteria should be living and breathing — Continually checking, and when necessary revising, your target criteria based on your updated strategy and market conditions is more than wise and could potentially avoid a failed acquisition.
Rushing to get to your short list of targets can eventually lead to buyer’s remorse and a deal that fails to live up to its hyped value. Starting with a vision and casting a wide net, then narrowing down your target focus with consideration for economic conditions, market trends, and your company’s unique M&A strategy can avoid deals that fall short of their projected value. Ultimately, being proactive versus reactive, organized in your deal search, and well-versed in current M&A trends will all serve as distinct, positive compass points as you navigate the world of M&A in 2021 and beyond.