Acquiree

What is an Acquiree?

An acquiree is a company, business, or corporation that makes for a viable candidate for a merger or acquisition. The acquirer is the company purchasing another company. The process of acquiring the target company can follow different scenarios, depending on the attitude of the acquiree’s management.

Often, the owners and shareholders of the acquiree are in favor of the transaction, ensuring a smooth takeover process. However, that is not always the case. If the acquiree’s management is opposed to the transaction, they can employ various methods to try to prevent the takeover.

An Insight into the Acquiree

The acquiree is often purchased at a premium – a price that is higher than the fair market value. This practice is very common, especially if the acquirer perceives that the target company will bring significant strategic value to the merger or acquisition. For example, if the acquirer expects greater economies of scale once it takes over the acquiree’s operations, it will be willing to pay top dollar so that the acquisition can go through. However, such benefits do not always materialize. There could be hidden costs, which the acquirer is not aware of, particularly when the acquiree turns out to demonstrate more social or cultural differences than anticipated.

When it comes to acquisitions, friendly takeover processes and smooth transactions are much more common than hostile ones. However, it is the latter type of acquisitions that make headlines. So, what makes a particular company a good candidate for an acquisition or merger?

Features of an Ideal Acquiree

1. Geographic proximity

One factor that makes a company attractive to acquirers is being strategically located. For example, if the acquirer can keep its production costs low by acquiring the other company, then the acquirer will be willing to pay a higher price for the acquiree. Thus, when there’s a smooth acquisition, the acquirer will look for ways to save money by minimizing redundant overheads. For example, there would likely be no need to continue keeping two warehouses when one is sufficient.

2. Clean operating history

Another reason why a company may be attractive to an acquirer is its operating background. This means that the target company has consistent sources of revenue and steady operations. Keep in mind that most acquirers want the acquisition to go through without any issues. As such, they avoid companies that have filed for bankruptcy in the past or that have a history of losing major clients.

3. Trend of enhancing shareholder value

How proactive has the acquiree been in narrating its story to the investment community? Does the target company show a trend of repurchasing its shares in the open market? Acquirers are not only interested in businesses that will thrive as part of a larger corporation. They’re also interested in the ability of the acquiree to carry on operations as an independent entity. As such, suitors prefer companies that can improve their shareholder value.

4. Experienced management

In some instances, when one company acquires another, the management team is replaced with a new one. However, in many situations, the management is retained because of their experience in running company activities. Therefore, many acquirers are interested in whether the acquiree is well run. Good stewardship serves as evidence that the target company’s assets are likely in good condition and that its client/customer base is content.

5. Minimal litigation threats

Nearly every company encounters a situation that calls for litigation at some point in its life. However, most acquirers stay away from companies that have experienced, or are experiencing, an excessive number of lawsuits. This way, the acquirer minimizes the risk of their investment in the target company.

6. Expandable margins

As a company increases its sources of revenue, it enjoys economies of scale. This means that while its revenue and profits increase, its overhead costs are kept at a minimum or remain constant. Overhead expenses refer to items such as rent, utility bills, and payments to suppliers and employees. An acquirer is attracted to a firm that shows the potential to improve its economies of scale. They prefer to purchase a company with a solid cost structure and a feasible plan for increasing its revenues.

7. Strong distribution network

Another feature that makes an acquiree attractive to investors is having a solid network of distribution. This particularly affects target companies that are in the manufacturing industry. The acquirer will want to know the number of sales the company is making and how it markets its products. An acquiree that is able to create its product in a cost-effective way and then deliver the product to its customers in a timely fashion makes the best candidate for an acquisition.

Summary

An acquiree is that company that is being sought as a takeover or merger target. Acquisitions are a common practice in the corporate world. However, an acquiree should possess certain features to make it attractive for an acquisition. These include having a clean operating history, a solid distribution network, and experienced management.

More Resources

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful:

• Defense Mechanism
• Hostile Takeover
• M&A Considerations and Implications
• Toehold Position/Purchase
• See all valuation resources
• See all equities resources