Matt Porzio, Vice President, Strategy & Product Marketing at IntraLinks Holdings Inc. (:ILN/A), spoke with WooTrader recently about the release of a new ground-breaking data-backed statistical study by Intralinks and Cass Business School in London designed to reveal to buyers, sellers and investors alike, “What makes an attractive M&A target?”
The research uncovered 6 statistically significant predictors of a company becoming an acquisition target – Growth, Profitability, Leverage, Size, Liquidity and Valuation.
WooTrader: Is this the first study of this type?
Matt Porzio: Yes, especially given the scope and scale. The data cover 23 years and more than 34 thousand targets.
This is not a white paper on how to make yourself more attractive as an M&A target. This is the first statistically objective study, with a little bit of market color thrown in that I’m aware of.
Under the growth caption the study shows that both the top and bottom 10% are more likely to be targets. Why do you think that is?
When the research started rolling in to us I saw that as well. Made sense that private growing companies, on a good trajectory have a lot of interest because they’re becoming competitive and frankly people want to take them out sooner rather than later.
On the bottom side, to me that’s a bit of bottom fishing. In other words, looking at companies that might have some interesting IP or product sets or may actually have superior profitability but have capped out. Either way, it’s the companies in the middle that languish.
Another interesting result is the fact when it comes to profitability there’s a discrepancy between private and public companies. Can you talk about that?
Yes. Private target companies are more profitable than private non-targets, whereas public target companies are less profitable than public non-targets.
Large profitable public companies are buyers, not sellers. On the private side though, highly profitable but highly leveraged companies are more likely to be targets.
When it comes to leverage and the likelihood a company will become an acquisition target the same differences appear. Why is that?
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.
With regard to differences between public and private companies, size also seems to make a difference. How do you account for that?
Private target companies are significantly larger than private non-targets, whereas public targets are significantly smaller than public non-targets.
Summing up, private companies that are targets are fast growers, generating profits but highly leveraged.
Public companies that become targets on the other hand are growing but may not have figured out the right path to profitability.
What about liquidity makes it a significant factor?
Liquidity is significant because it’s key to the ability to grow. If you don’t have that ability, you are trapped and that’s what makes you a target.
Companies with liquidity challenges – even public ones – are often targeted for acquisition.
What makes valuation important?
Putting my former banker hat on, this is the one we always looked at. Everything is based on enterprise EBITDA. When there is lower valuation the question often asked is “What is driving that?”
The next question for a potential acquirer is, “Can I fix that?” If you believe you can that company with the lower valuation becomes a target.
This study also queried M&A professionals on non-financial attributes of the deal-making process. What was learned there?
We recognize that these non-financial attributes are the soul-drivers – the things that make a target attractive.
The first thing is strategy and fit of whatever it is. For example, if you are in tech and it’s a unique IP that becomes important. If brand or recognition are critical, for example in retail or media that becomes an important non-financial attribute.
Now more than ever we see more understanding about “Can we get the value?” The ability to work with a company, cultural fit, ability to integrate, system integration - those things are all coming to the forefront as reasons to target or not to target.
There’s A Calculator For That
The full Intralinks/Cass study can be accessed here. In addition, Intralinks has created a calculator designed to allow anyone to plug in company metrics to determine if a company is “Hot” or “Not” when it comes to being an acquisition target.
Calculations are based on results for the 34,000 companies studied for the report. Porzio cautions that the online calculator is not for “in-depth” analysis but for general information.