Screening Targets in M&A

Screening Targets in M&A

In 2022, the term M&A has become synonymous with acquiring a digital asset, and in my view, a conventional M&A done for scale decades back contrasts with developing a digital business.

Analysts are no longer talking about valuation (a blunder) as most digital businesses burn cash, are small, and acquirers are betting on their growth potential rather than their existing growth. I believe being part of multiple such deals and identifying the target company is the critical success factor.

The target company should bring at least one of the following to the table:

1) Customer-ready offering that buyers can take to their customers immediately

2)Distinctive technology and talent

3)Capture/entry to an adjacent market with significant potential

The buyer should avoid reaching out if the target does not bring at least two of the above three points to the table.

As most digital deals come with a premium, the buyer’s #duediligence and integration strategy must be good to generate #shareholdervalue. In my view, the buyer needs to focus on the following:

1)Revenue synergies (as the majority of targets are small, cost synergies are minimal)

2)Talent and Operating model – The litmus test for the buyer is to preserve the target’s talent and have an operating model that validates the growth potential it saw when screening the target.

3)Technology integration is necessary for an IP acquisition, especially when the buyer should discard technology debt arising from this deal.

Acquiring digital companies and generating shareholder value is challenging as most deals fail because the buyer either does not identify the right target business or fails to evaluate it strategically. If the buyer does it right, it messes with integration as most target employees and customers leave within 12 months of the deal announcement.