What are the best strategies for identifying promising M&A targets?

While understanding client goals is key, excel by diving deeper than financial metrics alone. Seek targets with hidden synergies beyond the obvious. Consider companies with complementary product lines, overlapping customer bases, or underutilized technology that could be integrated to unlock exponential value. Explore adjacent industries where your client's expertise could be leveraged for unexpected growth. Don't shy away from seemingly "unconventional" matches – sometimes, the most promising gems shine brightest when unearthed from unexpected places.

When identifying promising M&A targets, aligning M&A benefits with organizational goals is key. Here are three strategies to help you identify the right targets: 1. Determine target evaluation criteria (i.e., financial performance, market share, customer base and product portfolio). 2. Identify target organizations, via industry reports, trade publications and online databases. 3. Understand your client’s goals to identify targets that align with their strategic objectives and increase the likelihood of a successful acquisition. A well-defined process that aligns with your organizational goals and takes into account your objectives can help you identify promising M&A targets that can drive growth and create value for your organization.

Absolutely! Knowing what your client wants helps you find good companies to buy or join with. For instance, if a client wants to expand globally, you'd look for companies with an international presence to merge or buy.

Take a simple example of an apparel shop, where you being the client describe what kind of dress you are exactly looking for and the shopkeeper tries to show dresses that might be same or close to the description. Do you see what I did here? It is the same with M&A, understanding what your client's goals are is very crucial to get an overall idea of what kind of business one should start looking at. These can be various types of goals, such as the type of growth, objectives, the valuation they are looking at, the financial position of that business, business model, risks associated, and whatnot.

While screening tools offer a wealth of data, the magic lies in curating the results with a human touch. Think like a skilled artist, not just a data analyst. Seek patterns beyond numbers: Identify subtle trends or unexpected commonalities that might signal promising synergies, hidden growth potential, or untapped market opportunities. Consider qualitative factors: Explore company cultures, leadership styles, and innovation track records to assess alignment with your client's vision and values. Remember, screening tools paint a broad canvas. It's your expertise and intuition that craft a masterpiece of M&A targets.

Identifying promising M&A targets requires a combination of screening tools, industry knowledge and financial analysis. While useful, screening tools should not be the only source of information. To compile a list of potential targets that is suitable, achievable and within your client’s financial reach, you need to leverage your own and your client’s industry knowledge. This involves screening through a lot of financials, industry magazines and brokers’ reports. Buy-side analysts can be a valuable source of ideas. They spend time with management teams, grasping insights on whatever strategic review may have been produced. Unlike bankers who are called to be mainly solution providers, buy-side analysts can afford to get creative.

Now that we understand our client's goals we move on to the next part which is to screen the businesses as we deem fit based on the client data. We can always get help from the screening tools out there like S&P Capital IQ, Bloomberg, Factset, etc. Screening is done on various criteria such as size, sector, location, valuation, performance, and growth, and at the end of it, we are left with the business which are met the criteria set and is evaluated further to get the potential M&A target to present to our client.

While data dives through reports and financials are M&A staples, consider injecting some detective work into your research. Seek out industry whispers and market murmurs. Network with analysts, consultants, and even competitors on the side-lines to uncover overlooked gems or brewing discontent in potential targets. This intel can reveal hidden synergies, potential deal sweeteners, or vulnerabilities you wouldn't find in spreadsheets. Remember, human insights can unlock hidden value and give you a crucial edge in crafting compelling acquisition strategies.

When it comes to identifying M&A candidates, a systematic search for targets is key. In terms of conducting primary & secondary research, the “hunt for growth” is evolving into developing broader market-sensing capabilities. The "right" valuation is often the catalyst to get things done, which often entails the assessment of potential synergies. (listed companies' Boards are not allowed to dismiss a coherent takeover bid out of hand). FIG players, whether listed or not, offer many more key data points (i.e., cost of funding, risk level, number of branches), most of them available. Bankers prove their worth when identifying preys which offer the highest upside and the highest probability of success, whether the merger is friendly or hostile.

If you notice, I mentioned the phrase "evaluated further" in my contribution above and this is what that 'further evaluation' is, conducting primary and secondary research. - Primary research is to get in touch with the potential target companies from the screening and understand their perspective such as interests, expectations, plans, etc. - Secondary research is doing the research with the data available of the target such as their annual report to judge their performances, credit ratings, and press releases, and the outcome is to understand the target's performance, position, and prospects.

Due diligence is like doing a deep checkup on a company before buying or merging. It involves looking at everything—financial records, contracts, operations—to make sure there are no surprises or hidden issues. For instance, before acquiring a company, you'd examine their financial books, contracts with suppliers, and any legal matters to ensure a smooth transition and avoid unexpected problems.

One of the key steps is to perform a thorough due diligence: it involves validating the financial information received and investigating potential bottlenecks for the impending post-merger integration. The role of the DD is to give you confidence about the target's health. Once chosen the ideal candidate, it is important to have a clear set of communication protocols, a centrally managed information gateway and establishment of target dates. Any deal can be fraught with risk: finding the right targets, pricing the deal correctly, successfully integrating the acquired business. Each of them could derail efforts to build shareholder value through acquisition, therefore, it is important to have a first-class M&A execution capability.

Due Diligence is a crucial step to confirm what our finding says about the business is right or might have some risks to it. This involves; - Financial due diligence which is an In-depth analysis of the target's financial statements, accounting practices, revenue streams, profitability, and potential liabilities. - Commercial due diligence which gives us a clear picture of the target's market position, competitive landscape, customer base, intellectual property, and operational efficiency. - Tech due diligence which is very significant these days ensures the target's technology infrastructure and systems. - Legal due diligence which ensures the target's legal contracts, compliance with regulations, potential lawsuits, and liabilities.

Once you've done the research, it's key to share what you've found with your client. This means laying out all the details about the companies you've identified as good matches and giving your advice on which ones they should consider. For example, if you've looked into various companies for a potential merger and found one with strong financials and a compatible culture, you'd present that as a top recommendation to your client, explaining why it fits their goals.

Culminate your analysis by transforming the data into a compelling story for your investment committee. Summarize key target attributes and market insights, highlighting the perfect match and potential synergies. Quantify benefits and risks, confidently propose a realistic valuation and deal structure

After all these above steps, it is time to present the findings and recommendations to the client. In this step, we will summarize all the findings of each step. This is done by laying out all the details about the targets such as name, HQ location, a brief description of the company, key products and services, team size, last 3Y rev growth, and listed or not if yes then the stock exchange name with company ticker, and then highlight the potential benefits and risks of the deal with a valuation range that can be expected if the client is to acquire the same. This way client has all the data he/she needs and then you need to lay a clear pathway of the M&A process to convince why they should go with your plan to execute the deal.

A discerning CEO grasps the value in evaluating rival management teams. Identifying a weaker team instils confidence that superior management capabilities will yield ample returns, irrespective of the price/premium paid. Alternatively, commencing with a list of key strategic advantages enables the pinpointing of the weakest competitors in the same category. When presenting findings, the process becomes streamlined, focusing on ranking transactions based on potential gains and the likelihood of smooth execution. Balancing the natural ambition for maximum gain with negotiating skill is pivotal. Leadership, patience, and resilience are indispensable when navigating the hubris and greed of the acquiree's management and its team of advisors.

Looking for Synergies are very important for the deal to be successful without synergies there is no value to be created post deal for acquirer. There are 3 types of synergies 1- Revenue 2- Cost 3- Financial

Conducting thorough DD is crucial, especially in cross-border M&A scenarios. In the FIG sector, my team noticed an influx of potential acquirers from a neighbouring EU country. A methodical investigation discovered that, despite the existence of global regulations legislating on the recording of banking assets (aka, Basel Rules), it was left to domestic legislators to identify and tax them. This discovery revealed a significant advantage for the acquiring company, creating a material difference in valuation due to funding costs. Once uncovered, such an “improper” (the sentiment of the law, rather than the letter) advantage was equitably split between both parties, markedly raising our client's proceeds, thus fostering a fairer outcome.