A few years ago, I wrote a research paper that investigated acquisition criteria in the computer and related electronics industries hoping to uncover information of use to companies that wish to become acquired. Recently I came upon this paper and after re-reading it decided that much of the information is almost certainly still relevant.
The only change I have notice since I wrote this paper is that there have been a number of acquisitions, both hardware and software, where the acquisition of technology has been highly touted in the press as the main purpose of the merger, e.g. Yahoo's acquisition of Inktomi. While this reason was mentioned in my paper, it did not take a prominent position. A more detailed investigation of such acquisitions and mergers might show that the factors discussed in my paper might have just as important as the technology acquisition.
For those interested in merger and acquisition activity, I am making my research paper easily available via the link below.
Enjoy,
Vince Busam
January 11, 2004
Click here for entire Research Paper
(704KB, Microsoft Word document, right click on link to save)
While there is much literature on the subject of mergers and acquisitions, little of it has been written from the viewpoint of the potential acquisition company. Thus little information is available to help the company during or before the acquisition process. Most of the available literature is written for the acquiring company and describes the way to select the correct acquisition and how to value it. While it is useful for a potential acquisition to read this literature, there is a need for information directly pertinent to the potential acquisition company.
This study attempted to view the seller's side of an acquisition. How should a potential target company position itself for an acquisition? What internal characteristics should it exhibit? What can it do in advance to be more attractive during the acquirer's evaluation process? Is there an optimum profile, and how might it vary?
The main research hypothesis for this study stated that the optimum profile of a potential target company will vary as a function of the organizational parameters of a potential acquiring company. The null hypothesis stated that there are no statistically significant differences in the criteria used for selecting potential acquisition targets by companies which are in different lines of business as defined by Standard Industrial Classification (SIC) codes and which are of different size as defined by sales in dollars.
A questionnaire was mailed to the chief executive officers of 118 acquirers in computer and related electronics industries. The respondents were asked to rate four major areas: financial aspects, market position, technology, and management, and sub-items in each, by distributing 100 points among the major areas and sub-items. In this manner the relative weightings of pre-merger acquisition criteria were sought. Follow-up interviews were held by telephone to validate the questionnaires and elicit additional data.
The questionnaire results, with a response rate of approximately 27 percent, provided statistically significant results in three out of ten major tests performed. Technology is more important to companies with SIC codes 35xx and 36xx than it is to those with codes of 73xx. Also market share is more important to companies with sales over $100 million than it is to those with sales under that amount. Financial aspects are more important to the larger companies than to the smaller companies. These results were inconsistent enough with those of a previous similar study that it is doubted the underlying significant independent variable has been found, although there is strong evidence that such a variable or variables exists.
A study of corporate acquisition criteria in the computer and electronics industry is being performed by Vincent A. Busam as part of a master's in business administration program through Pepperdine University. The purpose of this study is to determine the most common criteria used by companies in evaluating acquisitions.
A questionnaire soliciting companies to contribute their acquisition criteria was mailed to 118 companies. These companies were selected because they were listed in the Federal Trade Commission's Statistical Report of Mergers and Acquisitions as having made an acquisition (or had an acquisition pending) from 1975 through 1977 of a company that had one of the following six SIC codes:
3573
Computing equipment, electronics
3674 Semiconductors and related equipment
3679 Electronic components, not elsewhere classified
7372 Computer programming and other software services
7374 Data processing services
7379 Computer related services, not elsewhere classified
For purposes of statistical analysis, 32 usable responses were received.
The companies were asked to divide 100 points among five areas that a literature search had shown to be important acquisition criteria. This division showed the relative importance of each area to the company. The five areas, ranked in order of importance based on the average scores, are as follows:
26 points--financial aspects
24 points--market position
22 points--management
18 points--technology
10 points--Other (mostly "fit" and growth potential)
Statistical analysis shows that the following differentiations, based on the corporate organizational parameters specified, can be assumed with a 95 percent confidence level. First, technology is more important to acquiring companies that have a SIC code of 35xx or 36xx than it is to companies with other SIC codes. Second, financial aspects are more important to companies with annual sales over $100 million than it is to those with sales under $100 million. Third, management is more important to companies with annual sales under $100 million than it is to those with sales over $100 million.
The following conclusions can be assumed based on a 90 percent confidence level. First, the "other" criteria (fit and growth potential) are most important to acquiring companies with SIC codes of 35xx and much less important to companies with SIC codes of 73xx (this conclusion is most tenuous because of the nature of any "other" category on a questionnaire). Second, these "other" criteria are more important to companies with more than $100 million in yearly sales than to those with sales under this figure (again tenuous). Third, technology is more important to companies with a SIC code of 35xx and less important to companies with a SIC code of 73xx.
Overall, the following five detailed criteria stood out as the most important criteria:
1.
Rate of growth of earnings
2. Rate of growth of potential market
3. Return on investment
4. Compatibility of management philosophy
5. Market share.
Written comments volunteered by the respondents strongly supported the need for a corporate fit. The acquisition had to bring something to the company that helped it achieve strategic goals. It appears that the responding companies are interested in orderly growth from their current business base rather than becoming too diversified. Another concern mentioned several times is risk minimization. Two respondents suggested risk analysis, and several others mentioned specific aspects of a risk analysis. Most of the other written comments are variations on financial considerations.
Three companies enclosed copies of their written acquisition criteria. All three criteria mentioned a target size for the potential acquisitions, a preference for companies that fit their current business, and a requirement that the the companies be profitable. Two of the criteria mentioned that the company must have good management.
This study was undertaken as a follow-up study to one performed on companies in the textile industry. Because of industry differences, comparisons by SIC code cannot be made, although the other study did find more statistically significant differences based on SIC codes within that industry. The previous study found that companies under $100 million felt market position was more important to them than did companies over $100 million. This study found no difference in market position but did find differences in financial aspects and management.
A literature search showed that very few studies had been undertaken to discover the actual evaluation criteria used by acquiring companies. Although the statistically significant results of this study are few, the overall information obtained, especially the written comments provided, supply a base of information for continuing study of this important subject area.
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