What predators look for in public and private firms
Small and underperforming public companies are more likely
to become acquisition targets, while the reverse is true for private companies,
a study has found.
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Renald Yeo
27 September 2016
Small and underperforming public companies are more likely to become acquisition targets, while the reverse is true for private companies, a study has found.
In the study, which was published on Friday, researchers from technology and deal-related service provider Intralinks and Cass Business School found that private companies are more likely to become acquisition targets if they are large, fast-growing, with high profitability, high leverage and low liquidity.
In contrast, public companies are more likely to become acquisition targets if they are small, fast-growing, with low profitability, low leverage, low liquidity and low valuations, the study found.
It examined six measures - growth, profitability, leverage, size, liquidity and valuation - that are "statistically significant" predictors of a company becoming an acquisition target.
The research is based on data from a global sample of 33,952 public and private companies with annual revenues of at least US$50 million, spanning over two decades from 1992 to 2014.
Some 1,407 companies from South-east Asia were sampled, including 453 firms from Singapore.
Commenting on the study's findings, Intralinks vice-president of strategy and product marketing Philip Whitchelo said: "Acquirers of private companies appear to see higher levels of profitability and size as important, whereas acquirers of public companies appear to be targeting those that are smaller and underperforming, with lower public market valuations - looking for weakness, in effect."
The study also found that companies in the energy sector are among those with the highest likelihood of being acquisition targets.
Private energy firms were found to have almost twice the probability of being an acquisition target in any given year than private companies overall; meanwhile, public energy companies had the second highest likelihood of becoming acquisition targets after firms in the finance sector.
"One explanation for this could be that the energy sector (is one) where it is more difficult to grow quickly organically due to the nature of the assets," Mr Whitchelo said. "Companies operating in those sectors are naturally more likely to become targets than those operating in other sectors such as consumer products and services."
Apart from financial indicators, however, the researchers noted that other metrics - such as a company's culture, for instance - play an important role in potential acquisitions.
"We look at the value and the name the company has made for itself in a particular region," said the head of M&A and strategic investment at a Singaporean public company in the study. "We believe in sustainable growth and have been focusing on companies that have been a part of it. But we also look at the way business is carried out and the culture within the company."