Predicting Acquisitions

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    Mike Pincher

    What are the best ways to know in advance upcoming acquisitions of smaller companies by the larger ones?


    Mohamed Emara

    Fast growing small companies attract big companies specially when there is a potential for these small companies to take a stake from big and well established companies’ market share. Also, specialized companies in pharmaceutical industry and information technology are more exposed to takeovers than others to reduce the R&D cost incurred by big entities.


    Korath Wright

    When a company is interested in selling, there can be a great deal of uncertainty around what the price and timelines will be. These can be significantly impacted by the transfer channel used, and can also vary within each transfer channel.

    Selling a business or unit within a particular time frame and in a certain price range can never be guaranteed, but predictive factors can still be discerned. A roadmap of expectations can be built through looking at which companies are attractive to buyers, where the company in question is now in comparison to market demand, and how it can get to where the buyers are buying.

    Valuation is as an art as well as a science. In private fragmented capital markets, value ultimately comes down to a deal between two or more groups. The particulars of each situation in the private market (and increasingly so with smaller deals) will have a bigger impact on the price than in a more cohesive market. In contradiction to the public capital market where comparable transactions can be more easily relied on for predictions.

    Significantly, owners can choose the channel for transferring their business. They can tailor the benefits their business provides towards related buyers, financial buyers or strategic buyers. Understanding this positioning and the markets conditions can provide material information towards predicting an acquisition.

    Related buyers tend to be the lowest price transfer channel, due to their internally leveraged nature. Prior relationships and expectations may take precedent over an absolute profit motivation for the sellers. These can often be prices based on investment value or fair market value. Related buyers may include:
    ❏ Family
    ❏ Partners
    ❏ Management buyout

    Financial buyers are interested in the cash flow, growth or turn around potential in a business. They may be targeting certain industries or business profiles. Financial buyers can include:
    ❏ Private equity
    ❏ PE sponsoring MBI or MBO
    ❏ Bolt-on deals
    ❏ Replacement owners

    Strategic buyers are interested in the previous aspects, and also interested in areas that advance competitive positioning such as R&D advantages, access to new markets and cross sales of products, gaining market share, etc. With more options and a greater perceived ability to generate value from a strategic merger, when motivated these management teams can often outbid financial and related buyers. Strategic buyers may include:
    ❏ Competitors
    ❏ Up-stream compliments
    ❏ Consolidators
    ❏ New Entrants
    ❏ Roll Ups
    ❏ Etc

    A variety of internal and external factors that the owners can and cannot control, drive value differently for each channel, and impact the predictions for being acquired. These range from company specific factors such as growth rate, management and locations; to broader aspects such as the economy, what competitors are doing, and what the cost of money is. Analysis of important issues for each channel and certain players within those channels helps build a predictive model for pricing; timelines; as well as the availability, cost and impact of improvements.

    One problem that may need to be overcome in positioning a company for acquisition is the goodwill that is particular to the owner or owner group. This is generally a greater proportion with smaller, closely held and private companies. It would be fine to take on this goodwill, but not to the extent of resale value that walks out the door with the seller of the business.

    Part of establishing a more accurate prediction model is essentially running the commercial, financial, HR, tax, cultural, environmental, etc due diligence processes backwards, and with consideration of what buyers are looking for. Additionally, this can include looking at the costs and what improvements are possible with regards to the price that can be achieved with various changes.

    These activities and others can contribute to the basis for predictions on when a small business will be acquired, for how much, and what may be required as part of the deal.



    Not limited to acquisitions of smaller companies by the larger ones, more and more predictions are based on programs constantly browsing the internet for every bit of information. The most famous tool is probably Blackrock’s Aladdin but everyone can relatively easily develop a code searching for information clusters to predict an acquisition.

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