Critical Steps in M&A Target Screening

Critical Steps in M&A Target Screening

Updated: Mar 12

When you hear about one company acquiring another, it seems like the process is over in a blink of an eye. You hear an announcement of a merger or acquisition, “ABC Co. announced its plan to acquire XYZ Corp. for $10M and stock…” and then the transaction occurs, and you might think, “Oh ya, I hear they were going to do that.”

However, the acquisition process is a bit longer than any blink.

You’ll note that when an announcement of this type is broadcast, the word “plan” is always a part of the news. That’s because a considerable amount of work went into the process to bring it this far. Let’s look at some critical steps in the planning process of target screening.

The Creation of an Acquisition Strategy

The most successful acquiring companies are proactive. They don’t wait for the call from some investment bankers to bring them deals. Instead, these acquirers are hunters. And what does a hunter do? He hunts. These acquiring companies are avid hunters—they’re extremely enthusiastic about acquiring targets.

In order to start the hunt, they must identify potential targets that make sense within the company’s overall business objectives. Growth through acquisition is most likely a part of the corporate growth strategy of a larger company. But these companies don’t acquire company for the sake of acquiring. Instead, they hunt in places where there’s a high likelihood of success.

They study the acquisition’s economic function, the purpose of the business transaction, and the resulting relationship between the merging entities. The result of this is the creation of an acquisition strategy where due diligence has identified the most promising market segments for growth and points out the commercial and financial hurdles for potential deals. An acquisition can result in growth, new market exposure, elimination of the competition, and greater efficiencies by adding more synergy.

To do this, the acquisition team must know their company inside and out, as well as the profile of the acquisition target and strategy.

Forming a List of Potential Targets

Once a clear acquisition strategy is set, the next vital step in the planning process is to create a list of potential target companies. The acquiring company must select an industry it is targeting and compile a list of companies that loosely appear to match the acquisition strategy.

Refining Your Target Criteria

Target list development continues with more information lists of targets. This can come from institutional learning, working with market and corporate M&A experts, and research into market segments where acquisitions have the ability to create value. They will identify potential segments and perform a thorough examination of the industry value chain and ecosystem. From this research, potential profit sources can be identified, along with emerging and disruptive technologies, customer buying patterns, and the critical components of a competitive advantage.

Once the acquisition team has developed its initial list, it will refine it by creating criteria for target companies. From this, an initial list of potential targets is developed based on detailed screening criteria.

Target Prioritization

With the initial list of potential targets created by applying the screening criteria, the acquisition team can reduce the list of potential targets further to an actionable priority list.

The culling of the potential targets to a categorized list is based on its parenting strategy, the potential for value-creating synergies, and the availability of the asset in the market.

Target Evaluation

With this refined list of targets, the acquiring company makes contact with the seller. Most of the work at this stage is to accumulate as much data on the potential target as possible. The remainder of this stage involves a comprehensive analysis and critique of the target’s current financial statements, revenue numbers, projections, and key performance indicators.

If the acquiring company fails to collect sufficient relevant data with which to completely and exhaustively evaluate the target, they will need to make an initial data request of the target. The acquiring company can leverage this information to determine if moving forward in the M&A process makes sense from both a strategic and financial standpoint. The due diligence at this stage in the target screening process is critical.


The creation of an acquisition strategy is a critical step in the acquisition process. Defining the detailed criteria to screen potential targets can be the point where the acquiring company can be certain that it’s on the right track.

Companies and hunters that have done their homework are prepared and will be nimble enough to take advantage of acquisition opportunities when they arise.

Read about Carpenter Wellington’s mergers and acquisitions practice.