M & A Target Selection

Stigler said:"Almost every well-known enterprise in the United States develops by merger and acquisition (M&A)." Compared with creating a new company, M&A can reduce the risks and save the expenditure. In China, M&A can improve industrial structure and realize liquidity of the stock resource. They can transfer stock assets from the inefficient enterprises to the efficient enterprises. But the result of M&A disappoints us. The choice of accurate target is very significant in guaranteeing the merger and acquisition successfully. Based on the basic knowledge in this field, this paper aims at discussing how to choose the target company. The paper consists of three parts, written from the general to the particular.SECTION ONE: FACTOR ANALYSIS OF TARGET-CHOICEFirstly, the chapter summarizes the steps of the target-choice in China. Secondly, the author analyses the relative policies and the changeable environments to impact on the target-choice. After that, this chapter analyzes the basic factors of target-choice. The four essential characters are as follows: 1. Industrial analysis. The chapter introduces some indexes and the professional reports about industry. They guide enterprises to choose the fascinating industrials. The theory of Porter suggests industrial structure analysis by five forces. It can forecast industrial prospect. 2. Financial analysis. It can be used to evaluate the target company and confirm the scale of the target company. Furthermore it can clarify the condition of the target company. 3.Operative condition analysis. In terms of the theory of organization and management, both the specific managerial experiences and highly qualified persons cannot be transferred from the acquiring company to the target company. So the target company should have them. According to the theory of product life cycle, the product of every enterprise has its own longevity. In order to develop continually, the acquiring company can assemble products according to the method of BCG. 4. Feasibility analysis. The enterprise weighs the benefit and cost of M&A before it makes a decision. The author comments on the contents of the benefit and costs of M&A.SECTION TWO: THE CHOICE OF TARGET FIRM UNDER TYPICAL MOTIVESThis part introduces how to choose the target firm under the different motives. The acquiring company has actual strength and can make the target company to coordinate with it. They are common principles of target-choice. Furthermore, the chapter introduces the major motives of M&A on the basis of the theory of M&A. The third part is keystone in the paper. It discusses six typical motives. 1. the motive of horizontal amalgamation. In terms of classic economics and contemporary economics, the correct meaning of economics of scale is that the output is more than input. Large scale does not bring about economics of scale. To Realize economics of scale, the enterprise must choose the target company on the basis of industrial scale. 2.the motive of vertical integration. Vertical integration can save some operative expenses and transaction expenses, but it increases the quitting barrier at the same time. The author thinks that the chosen industrial should have vertical features and has steady market demand. Enterprises should choose the company who operates well and who is coordinated with it. 3. the motive of diversification. The diversification comes into being by reason of adapting social environments and the internal demand of companies. The diversification has the some advantages, such as risk sharing and the saving of transaction expenses, but it also has some disadvantages, for example, it complicates management. The precondition of the diversification is that the acquiring company has superiority in the main operation .The free cash flow and products of the acquiring company are irrelative to the target company. The assets of the target company have some special characteristics. So it demands the target company whose assets have high quality and whose operation behaves well. 4. the motive of obtaining li...