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M&A practitioners often haggle over the ideal number of targets for their acquisition pipeline.
Research conducted by McKinsey of active acquirers suggests that, to close 10 deals a year, a company must identify roughly 100 candidates, conduct due diligence on around 40, before acquiring 10.
These ratios may vary by industry and your company’s experience, but the research is proof of the importance of having an acquisition pipeline.
Below, SourceCo, a buy-side deal sourcing platform, looks at this theory in more detail for M&A practitioners.
An acquisition pipeline, in the context of mergers and acquisitions, is a list of companies that have been identified as potential acquisition targets.
Maintaining an acquisition pipeline is a way in which companies can make their M&A process more planned and systematic. The acquisition pipeline begins with the identification of potential targets, before being whittled down, through due diligence, and should end with the closing of the deal(s).
In addition to providing companies with data on potential targets, the acquisition pipeline has the added advantage of enabling CXOs to gain a better understanding for their competitor landscape.
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In short, the purpose of an acquisition pipeline is dealmaking that adds long-term value.
At the outset, the acquisition pipeline should provide dealmakers with a bird’s-eye view of whether their list of targets aligns with their strategy.
For example, if the list indicates that there are companies of different sizes, industry segments, and geographies, they should be asking whether they’ve adopted a scattergun approach to their acquisitions.
By providing clarity here, the acquisition pipeline enables the M&A practitioner to focus more on what they want to achieve from deals.
The acquisition pipeline also adds value as a project management tool. In addition to giving some high-level detail on each target, it motivates dealmakers to establish how far they have progressed (or otherwise) on a deal with each.
A good acquisition pipeline should clearly show which companies have been contacted, who within the company was contacted, along with a summary of that initial contact. It should also provide information on how far due diligence has progressed, and what the next steps for each target is.
Related:
An investment strategy is the most important part of an acquisition pipeline. It’s not explicitly mentioned on most acquisition pipelines, but it underpins the motives for adding each of the target names to the list.
If (ie. corporate) or PE strategy dictates that your company has a roll-up strategy to generate growth, it makes no sense for your PE firm to source deals & companies of a similar size to your own.
Similarly, if the aim is to acquire companies with proprietary technology (IP), every company in the acquisition pipeline should have IP of some form.
The steps involved in creating an acquisition pipeline include:
Assuming your corporate strategy has been developed, that should be used to develop criteria for companies on the acquisition pipeline. Examples may include revenue, employee numbers, industry, geography, product and service offering, etc.
Good targets don’t usually appear without some groundwork on behalf of the acquirer. For this reason, large companies employ people who work around the clock to research suitable target companies with the chosen criteria.
As the list grows, you can start to conduct a preliminary analysis of each of the target companies, separating those which are real targets (i.e. those that meet and exceed the acquisition criteria) from those that aren’t.
Potential targets should be sounded out about their interest in a deal. This information also informs the acquisition pipeline, and the information provided by the target during this contact should be maintained for future reference.
Assuming that the initial contact went well, and that the target is open to a deal at a valuation within a range which you deem acceptable, due diligence can begin, starting the acquisition process in earnest.
A typical acquisition pipeline should have several headings, enabling anybody with access to quickly gain an understanding of the company’s current acquisition prospects.
Typical headings include:
The processes and headings involved in the acquisition pipeline outlined in the above section are not set in stone.
One of the motives of an acquisition pipeline is to bring focus to a company’s M&A strategy. Use whatever means you have at your disposal to adapt the acquisition pipeline to add to this focus.
For example, this is likely to involve different evaluation criteria or additional stages to add before making contact with a target company. Other criteria may include capital structure, key supply chain relationships, or even cultural fit.
As more time is invested in the acquisition pipeline and it has been refined - there’s a good chance that not all of the initial criteria you have laid out will be relevant having analyzed the market in detail.
Company stakeholders that own the pipeline, such as the corporate development team, can develop additional criteria and considerations that influence decisions at each point - where critical evaluations and commitments are made.
This helps them to better understand the factors that determine whether a potential acquisition progresses or not.
An acquisition strategy is the part of a company’s growth strategy, which specifically deals with non-organic growth.
Its aim is to identify where opportunities for growth lie in private equity or corporate development transactions - typically, mergers and acquisitions.
If the acquisition pipeline is one output of the company’s acquisition strategy, then planning is one of its inputs.
There are numerous challenges inherent in maintaining value-generating acquisition pipelines.
These include:
You may find that there aren’t many companies that fit your deal criteria, rendering the acquisition pipeline near impossible to execute.
Mitigating Action: Understand which of the criteria is making the list so hard to construct (e.g. proprietary technology tends to reduce a lot of industries to just a few companies), and decide whether these are key. Don’t over-compromise if the criteria are key to your company’s acquisition strategy.
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On the other side, it’s also possible to identify too many targets, taking up thee corporate development team’s resources in putting together an exhaustive list of potential targets.
Mitigating Action: In this case, it may be useful to regroup and decide on extra criteria for adding companies to the list. Decide first which criteria are flexible and which aren’t. Consider that there are literally millions of companies with revenue under $10 million, but the numbers diminish quite rapidly above this threshold.
Some companies may find their way onto the acquisition pipeline because they’re ‘close enough’ to the criteria, thereby creating a less focused list of companies, that are more or less attractive targets.
Mitigating Action: This is why setting and continuously re-evaluating acquisition criteria is so important. Similarly, when too many targets are entering the list and being discarded, there’s likely to be something wrong with the initial evaluation criteria for companies.
Detail and accuracy are important on the acquisition pipeline. If information has been obtained on a company through desk research, it needs to be referenced accurately.
Mitigating Action: This isn’t always easy with a traditional spreadsheet, so it’s important that acquisition pipeline software is used to ensure that you have full visibility over where you are in the process with each target company.
As the acquisition pipeline grows, and more companies are contacted, companies typically find the process becoming far more than just maintaining the list itself.
For those, that use several tools, this can become unwieldy.
A typical set of tools used for the acquisition pipeline might include:
This is a dizzying range of tools for a process whose success is underpinned by focus.
There are so many pieces of vital information that can fall between the cracks by using a suite of tools like this that maintaining an acquisition pipeline almost becomes more effort than it is worth.
A deal pipeline is an essential tool for funds and companies which are serious about M&A. It builds on the acquisition strategy to bring focus to the process.
An equally critical aspect of sound acquisition strategy is having clear visibility and access to the entire universe of possible targets - the 200+ mil. of private companies out there.
It's a key part that dictates both quality and strategic fit of a target. When partnering with the right buy-side acquisition partner, PE funds and strategic buyers can identify the best-fit targets faster, at a lower cost. Book a call with us to learn how we can help you find pre-vetted targets that fit your investment criteria.
Curious about untapped targets? Schedule a free call to find a pre-vetted fit even in the most niche of searches
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