The sourcing of acquisitions is a key topic when implementing an inorganic growth strategy and is constantly reviewed by trade and financial buyers. Broadly speaking, the source of prospect acquisitions can be broken into two categories, on-market and off-market. This article will explain what these are, alongside any advantages and disadvantages.
As the name suggests, an on-market acquisition is when a company buys another company that is actively being marketed for sale. This means that the target company has already put itself up for sale and is actively soliciting bids from potential buyers. Usually, this is with the support of an advisor, typically a corporate finance partner, investment bank or accountancy firm.
An off-market acquisition is when a company buys another company that isn’t actively being marketed for sale following a direct approach either by an acquirer or acquirer’s advisor. This means that the target company is not soliciting bids from buyers and may not even be aware that it is being targeted for acquisition.
There are several advantages to an on-market acquisition. Firstly, it is more transparent, as the information about the target company will be summarised in marketing material, drawn up by an advisor. This can make it easier for the acquirer to review and value the target company. Secondly, the business should be ‘ready for sale’ as the shareholders along with their advisor have had this process in mind and appropriately aligned the business for a sale. Finally, acquisitions which are on-market tend to have a higher chance of closing, partly because of the seller’s desire to conclude the project.
There are some disadvantages to an on-market acquisition process which should be considered. First, it is often more time-consuming, as there are more parties involved, all courting and requiring the attention of the vendor and their advisors. In addition to the length of time it takes to transact, strict deadlines often need to be adhered to, so the relationship between buyer and seller isn’t natural. For example, the buyer doesn’t get to fully understand the culture and inner workings of the company because they are limited to a structured sell-side process. Finally, due to multiple buyers and bids, competitive tension is created which can steer the discussions towards a price maximisation effort and key ancillary considerations are not as prioritised.
Off-market acquisitions can be advantageous to buyers, for example - if the acquiring company isn’t receiving enough deal flow relevant to their company from the sell-side community, they have the option of proactively approaching companies who are strategically aligned to what they want, or they can leverage a buy-side advisor to find companies which fall within their desired investment remit. If the buyer wants to avoid any sort of bidding process, making a direct and strategic approach might enable a deeper relationship and give opportunity for both parties to build stronger rapport, without strict timeframes or external pressures accelerating the review phase.
There are also some disadvantages to off-market acquisitions for the buyer. Firstly, it can be difficult to get information from the vendor, which makes it difficult to assess the synergies and intrinsic value of the target company. Secondly, the vendors might not be prepared or aware of the typical sale topics, such as working capital and debt, this can make discussions around deal structure and valuation tricky. Due to not being ‘for sale’ and countering the point on competition, owners can end up demanding a high premium in order for them to seriously consider selling, which can ultimately be above and beyond what the buyers deems realistic for the target company.
The decision to pursue an ‘on’ or ‘off-market’ acquisition depends on the circumstances and strategy of the acquirers. The best approaches will vary depending on the buyers goals, the vendors situation and current market conditions. There is certainly no correct method above all others. Timing is everything in M&A and for some buyers, waiting for a particular target company to potentially come to market might be unrealistic. Equally for some company owners, who want to maintain a strict confidentiality discussion, having a direct approach might enable them to review a sale without the necessity of multiple people/companies being aware they’re considering an exit. It really depends on the appetite of buyer and seller and their individual objectives.
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