Identifying takeovers?

Question

What do corporations usually look for when scouting for a takeover target? I'm told a low debt ratio is an important factor when considering a takeover target since the aquired company usually will need to take on substantially more debt. What other factors do companies look out for when identifying takeover targets?

Answer 1

There are so many potential factors to look at... here are some of them:

1) Growth potential -> revitalizes buyer's growth by buying into a new growing market

2) Synergy -> 1+1 > 2

3) Vertical integration -> margin expansion (buyer makes money on both ends) and increases pricing power (either get better deal from vendors or better prices from customers)

4) Horizontal integration -> cost savings through consolidation

5) Cash Flow -> cash flow can pay for itself in a few years' time for a cash poor company.

6) Undervalued assets -> real estate reported at cost may hide actual market value

7) Patents & R&D -> Intellectual Property may be licensed out or help buyers resolve lawsuits/royalty problems

8) Industry know-how -> special trade secrets or personnel to break into a niche market

9) Market Share -> expands market penetration

10) Licenses -> TV or radio stations which holds exclusive government licenses

11) Tax Incentives -> some companies/industries enjoy tax breaks and may help the buying company hide some profit

12) Locations -> a buyer who wants to expand into certain regions can do it through someone who's already set up there.

... and many more...

Just Be!

Answer 2

One of the main areas is strategic.

Does this company give us a new section of the market or is it simply a competitor.

Culture. Taking over a business with a different culture or structure can create big problems with later integration.

Vertical integration. By taking over this company willl I control more of the production.

Future proofing. Sometimes you want to take over a company in an emergent area to replace your old shrinking markets.

Affordability. Sometimes a company is bought because it is currently cheap. The hostile takeovers of the 80s worked that some companies had assests worth more than their stockmarket value, so you could buy the company, break it up and sell the parts and make a profit.

The technical aspects of takeovers are less important. But it is all part of whether taking over another company adds value to your company.

Debt is one of the areas, but when google bought youtube debt wasn't the issue that scared off other companies, it was potential legal risks. Once google bought youtube all sorts of law suits were taken out against the company. However google sees youtube as a complimentary part of their business and would have taken the cost of these legal battles into account their profit (value)/loss calculation.