Companies in the Energy sector are among those with the highest likelihood of being acquired
New online calculator revealed for companies to determine likelihood of acquisition
LONDON, UK, 20th September, 2016 – Intralinks, the leading global provider of Virtual Data Room software and services for managing M&A transactions, today announces the release of “Attractive M&A Targets: Part 1 – what do buyers look for?,” a report based on a new study into what makes a company an attractive acquisition target. Conducted in association with the M&A Research Centre at Cass Business School, City University London, 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 research findings provide predictive insights into which companies are likely to become acquisition targets, highlighting significant differences between private and public company targets. 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.
The research finds six measures that 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.”
The sample in this study comprises a global dataset of public and private companies, with minimum annual revenues of US$50 million, during the period 1992-2014. The sample includes 24,507 unique public companies and 9,445 unique private companies, a total of 33,952 unique companies, which translates into 275,713 firm-year periods. The financial data for the sub-sample of public companies was obtained from Datastream and the financial data for the sub-sample of private companies was obtained from Thomson One Banker. Data on takeover bids for the target companies was also sourced from Thomson One Banker. Within the sample, target companies are defined as companies subject to a “change of control” takeover bid, where the acquirer is proposing to acquire more than 50% of the target. The study examines six financial measures of the companies in the sample to identify if any significant differences exist between companies that become the subject of a takeover bid in any given year vs. those companies that do not. These measures are:
- growth (three-year compound annual growth (CAGR) in sales) prior to takeover bid;
- profitability (ratio of three-year average earnings before interest, tax, depreciation & amortisation (EBITDA)/sales) prior to takeover bid;
- leverage (ratio of three-year average debt/EBITDA) prior to takeover bid;
- size (sales) prior to takeover bid;
- liquidity (ratio of current assets/current liabilities) prior to takeover bid; and
- valuation (ratio of enterprise value (EV)/EBITDA) prior to takeover bid.
These financial measures of the companies are analysed for the study period as a whole and also during five distinct M&A cycles:
- the 1992-1999 expansion of the M&A market, the latter part of which was accompanied by a boom in internet/technology stocks;
- the 2000-2002 M&A market contraction, following the bursting of the 1990s early internet/technology stock market bubble;
- the 2003-2007 expansion of the M&A market, which was accompanied by an increase in corporate and consumer credit, leverage and financial derivatives;
- the 2008-2009 M&A market contraction, which was marked by a global financial crisis, a reduction in liquidity and lending, bank failures and government bailouts of financial institutions; and
- the 2010-2014 period, which has been marked by an uneven recovery, global monetary easing, low inflation, low interest rates and a significant increase in very large transactions (mega deals).
For each of the six financial measures, the probability of being a target is analysed based on a percentile ranking of the companies along each measure. This allows us to see how the likelihood of being acquired changes with respect to changes in the value of each financial measure. The percentile ranking of each company was constrained to companies from the same region, industry and for the same year. A probit regression analysis is performed to see if any of the six financial measures (independent variables) are statistically significant predictors of the likelihood of being acquired. The dependent variable in the probit model is a dummy variable which is equal to one if the company is acquired in a given year and zero otherwise. Based on the results of the regression analysis, a predictive model is built which calculates the probability of a company being an acquisition target.
As part of the study, interviews with 20 executives working for corporate acquirers and 20 executives working for private equity (PE) firms were conducted by Remark. These M&A professionals offer their insights and provide context to the research findings.
About Cass Business School
Cass Business School, which is part of City University London, is a leading global business school driven by world-class knowledge, innovative education and a vibrant community. Located in the heart of one of the world’s leading financial centres, Cass has strong links to both the City of London and the thriving entrepreneurial hub of Tech City. It is among the global elite of business schools that hold the gold standard of triple-crown accreditation from the Association to Advance Collegiate Schools of Business (AACSB), the Association of MBAs (AMBA) and the European Quality Improvement System (EQUIS). Cass educates nearly 4,000 students each year on globally renowned programmes across all levels of study from Undergraduate, to Masters, to Executive Education. The school is ranked second in the UK for best graduate universities for finance professionals (LinkedIn University Rankings) and their Business & Management and Accounting & Finance degrees are ranked first in London (Guardian University Guide 2017). The faculty at Cass are experts in their fields, producing cutting-edge research with real-world impact. The recent Research Excellence Framework results assessed 84% of Cass research to be world-leading or internationally excellent.
Intralinks Holdings, Inc. (NYSE: IL) is a global content collaboration company that provides cloud-based solutions to control the sharing, distribution and management of high value content within and across organizations according to the highest-level of security and the most stringent compliance regulations. Over 90,000 clients, 99% of the Fortune 1000 companies, have depended on Intralinks' to digitally transform and simplify critical business processes and secure high-value information. With a 20-year track record of enabling high-stakes transactions and business collaborations valued at $31.3 trillion, Intralinks is a trusted provider of easy-to-use, enterprise strength, cloud-based collaboration technology. For more information, visit www.intralinks.com.
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