The Essential CFO: A Corporate Finance Playbook

Chapter Seven

Identifying Acquisition Candidates

PROBABLY THE MOST IMPORTANT determinant of success in an acquisition program is identifying attractive candidates in the first place. If a potential transaction does not make strategic and business sense, it's highly unlikely to create shareholder value—no matter what price is paid or how well it's executed.

RATIONALE FOR ACQUISITIONS

A threshold question is Why pursue mergers and acquisitions? Do they make any sense as a business strategy? CFOs should ponder this question carefully before embarking on an acquisition program. The skeptics abound, and CFOs will need to have a firm grasp of their rationale for pursuing them.

At the outset, they should acknowledge that many academic and market commentators have argued that acquisitions have a high failure rate, often destroying shareholder value. Indeed, the empirical evidence indicates that while acquisitions generally create net value, the benefits obtained by the acquirer often are outweighed by the premium it has paid to the target's shareholders. Also, the skeptics rightly point out that their execution is fraught with risks that range from failing to identify potential liabilities, to underestimating the degree of difficulty in melding two disparate cultures, to creating conflicts in distribution channels and customer relationships.

Nevertheless, CFOs should recognize that while strategic transactions admittedly are difficult to execute, this is likewise true with alternative ...