A Proposed Methodology for Identifying M&A Prospects

Business Development Directors are charged with identifying the most likely prospects for practice areas. In some cases this can be a relatively easy endeavor. In others, it is difficult, if not nearly impossible. Take mergers and acquisitions, as an example. They are cloaked in secrecy for good reason. The opportunity to handle a representation of either the acquirer or acquiree tends to come through relationships among the existing client and referral base, when they come. For the largest corporate law firms with a track record for handling the most complicated of these transactions, their reputation often produces the work. But for most mid-tier and smaller law firms and M&A practices, one has to work hard to land a new client or transaction.

Dialing in on likely prospects.

To land M&A work, it's best to be in a position in which you know beforehand about the deal. But this requires trusted relationships in either the acquiree or acquiror companies. However, what if you could predict which companies were likely to be acquired or were positioned for acquisitions? Like a quarterback anticipating yards ahead of his sprinting receiver there is a simple analysis that you can perform to narrow the field and anticipate the likely participants in M&A deals. The following research method which I developed can be helpful in narrowing the universe of prospective companies that may either be ripe candidates for an acquisition or companies which may be in an acquisitive position.

Here's how:

To begin, pull a list of companies within a specific industry in which the Firm does a significant amount of work. Preferably, your firm does M&A work for multiple companies within this vertical. The more narrowly defined the industry and the more work performed in this industry sector, the better. You can pull a list using Dun and Bradstreet / Hoovers to identify companies in the segment, among other sources. Constrain your company search on D&B/Hoovers by size until you get a manageable sampling of companies, 15-25 companies is a good number.


Next, pull each company’s 'book value' (an indicator of the company’s size) and its 'market-to-book ratio' (an indicator of its performance). For this analysis, I’d suggest pulling these numbers using the three year average in order to smooth out circumstances which might otherwise distort the numbers too much, such as an acquisition, sale of a division or other significant event.

Plot each company on a chart putting performance (market-to-book ratio) as the vertical axis metric and size (book value) as the horizontal axis metric. Divide the chart into four quadrants at the median for each metric. Adjust the high and low measures for each metric so that the range encompasses the universe of companies within the four quadrants of the chart.

In reviewing the position of each company, you will see companies dispersed throughout the chart. Some companies will be larger and with strong performance. These will be situated in the upper right hand quadrant of the chart. Small companies with slow growth will sit in the lower left hand quadrant of the chart. Small companies with strong performance metrics will be found in the upper left hand quadrant and big companies with slow growth will be found in the lower right hand quadrant. The likely acquirers will be the larger companies who need to goose their performance through the acquisition of smaller companies whose growth is being driven by a new technology or product.

A quick review of your client mix can tell you whether you do work for any of these companies. Hopefully, you do not have too many that are in the lower left hand quadrant of the chart. But clearly, several will show up somewhere on the chart if you selected a segment in which the firm does a sizable portion of work. Regardless, reviewing each company for its proximity to the firm, other financial metrics, existing contacts and relationships and recent media reports will enable you to narrow the list to the ones in which there is a chance that they will be acquired or an acquirer in the foreseeable future.

It’s then simply a matter of developing a sales plan and working that plan consistently to build the relationships necessary to represent the company.

If I can help you target M&A prospects more effectively, call Eric Dewey at 502.693.4731. You'll find that I am an eager resource and that it costs nothing to talk.