The Research On Selection Of Target Company In Merger And Acquisition Activity

As a kind of investment activity, M&A(merger and acquisition) is not only a method for enterprises to obtain indirectly the factors of production and to recombine the assets, but also one important means to lower costs and realize large-scale production and diversification of assets. Compared with other modes of investment, e.g., securities, futures and fund investment, M&A is more complex. During merging, an acquiring company has to continue to manage the merged assets besides carefully choosing the M&A target. In the process of M&A, an acquiring company roughly goes through four stages: selecting a target company; designing a scheme of M&A; negotiating and contracting with the target company; taking over and integrating the assets of the target company. "The correct goal means half of success."The principle can be also applied to M&A. However, the M&A history in the last hundred years shows: part of acquiring companies neglected the M&A target-choice so that they chose the target company in error at the beginning of M&A; this kind of M&A often ended in failure. Therefore, the paper will focus on the problem: how to choose the target company while merging? The author holds that the acquiring company should set about from three following aspects to solve the problem: establishing the effective restriction and incentive mechanism for administrators; reasonably selecting the economic fields where the acquiring company will enter; scientifically choosing a target company in the fixed economic fields. In the process of M&A, M&A target-choice is completed by the administrators composed of the directorate and managers. Because of the deputation relation in enterprises, the utility goal of administrators will often be inconsistent with the owners'. Under such conditions, the administrators will make decision or selection profitable to themselves during merging. Thus, the effective restriction and incentive mechanism for the administrators ought to be established in order to restrain them from inconsiderately carrying out merging. M&A is an important way to realize the company's development strategy, so the administrators should base on the strategy to decide whether to carry out merging or not. The administrators can set down the company's development strategy by using SWOT model, Strategic business planning grid and Strategic cluster model on the basis of analyzing the PEST, the industrial structure and the core competitive capacity. Then, the categories and motives of M&A can be ascertained in terms of the company's development strategy and the direction of M&A comes into being, too. During selecting the optimum target company, the administrators should investigate on the selected objects from four aspects: management state, financial situation, human resources and corporate culture, etc. Next, they ought to roughly value the assets of these objects and analyze the possibility of M&A from the point of the payment means and the financing way. At the same time, the administrators should also consider some other relevant factors with the M&A target-choice. If the result of selecting is that several better target companies are found out, the method-Analytical Hierarchy Process can be used to select out the optimum one from them. PHA is an effective means to deal with those problems that are complicated and can't be solved with the quantitative methods totally. The enterprises in our country, especially the state-owned enterprises are easy to make the mistake of the blindness in the process of M&A. The main reasons lie in: 1) M&A lacks of strategy because of too much interference of the government; 2) The efficiency of the restriction and incentive mechanism is low; 3) There are too few social intermediary organizations in our country and their function is unsound; 4) Imperfect capital markets result in the financing handicap in the process of M&A. Therefore, these shortages should be conquered so that the better environments of M&A can be offer to our country's enterprises. This paper regards Marx's dialectical materialism and historical materialism as the guidelines and takes the dialectical logic and formal logic methods as research methods. On the basis of introducing some existing research results and practical experiences of M&A and analyzing the new situation appearing in the globalization process, the paper study the process of M&A target-choice for the purpose of offer a thread for our country's acquiring company.