The M&A Research Centre at Cass Business School, City University London, has released a report that provides predictive insights into which companies are likely to become acquisition targets, highlighting significant differences between private and public company targets.
Conducted in association with Intralinks, the research examines six key financial measures of almost 34,000 public and private companies, each with annual revenues of at least $50 million, over 23 years.
The report notes the six measures are statistically significant predictors of a company becoming an acquisition target. It also finds that significant differences in the values of these measures impact the probability of being acquired. The measures are:
- Growth: Target companies have higher growth than non-targets. Our study finds that over the 23-year period, the growth of target companies is 2.4 percentage points higher than that of non-targets. The growth “premium” of targets becomes even higher during market downturns, recessions and periods of economic uncertainty.
- Profitability: Private target companies are more profitable than private non-targets, whereas public target companies are less profitable than public non-targets. Since 2000, profitability of private targets is 1.2 percentage points higher than that of private non-targets, whereas profitability of public targets is 1.7 percentage points less than public non-targets. Since 2008, public targets are 3.3 percentage points less profitable than public non-targets.
- Leverage: Private target companies are significantly more leveraged than private non-targets, while public targets have lower levels of leverage than public non-targets. Private target companies have over three times more leverage than private non-targets. Post-2008, public targets have 11% less leverage than public non-targets.
- Size: Private target companies are significantly larger than private non-targets, whereas public targets are significantly smaller than public non-targets. Private targets are 63% larger than private non-targets. Public targets are 55% smaller than public non-targets.
- Liquidity: Target companies have lower levels of liquidity than non-targets. Companies in the bottom two deciles for liquidity are on average 35% more likely to become acquisition targets in any given year than companies overall.
- Valuation: Public target companies have lower valuation multiples than public non-targets. Public companies in the bottom three deciles for valuation are on average 30% more likely to become acquisition targets in any given year than public companies overall.
“We found that high leverage and large size are the two most statistically significant predictors of a private company becoming an acquisition target, whereas small size and low profitability are the two most statistically significant predictors of a public company becoming an acquisition target,” said Philip Whitchelo, Vice President of Strategy and Product Marketing at Intralinks.
“Since 2008, acquirers have been particularly targeting underperforming public firms, because underperforming public companies are more likely candidates for operational improvements and cost savings through merger synergies. Buyers also take advantage of public companies whose valuations have fallen the most during market downturns.”
Companies in the Energy sector are among those with the highest likelihood of being acquired. Private energy companies were found to have almost twice the probability of being an acquisition target in any given year than private companies overall, and public energy companies had the second highest likelihood of becoming acquisition targets after companies in the Finance sector.
Commenting on the results, Professor Scott Moeller, Director, M&A Research Centre at Cass Business School in London said: “There have been many historic deals which reflect our results. Take the acquisition of Panasonic Healthcare Co Ltd by KKR in 2013, or the acquisition of Whyte & Mackay by Emperador in 2014 or the acquisition of Biomet by Zimmer in 2014 – these targets had high probabilities of being acquisition targets based on their leverage and size – and this eventually became a reality.”
Intralinks has also developed an online interactive calculator, using the methodology used in the study, so companies can compare how attractive they are to potential buyers.