One of the things that makes the mergers & acquisitions marketplace so unpredictable is that buyers don't all share the same acquisition criteria. Traditionally, there have been two types of M&A buyers:
1. Financial, which look for acquisitions that will produce a return on investment.
2. Strategic, which primarily seek business synergies.
Such broad objectives, as well as industry, size and other factors, influence how buyers evaluate a target company's numbers. Although certain characteristics have an almost universal appeal no one is likely to sneeze at 15 percent annual earnings growth, for example ideal numbers often are in the eye of the beholder. Both financial and strategic buyers typically start by looking at a target's earnings before interest, taxes, depreciation and amortization (EBITDA). EBITDA measures the operation's profitability before the factors that probably will change after the merger such as debt structure, taxes and the amount of fixed assets it takes to generate sales.
EBITDA also can help buyers compare profitability between acquisitions in the same industry. Caution, however, is warranted because EBITDA isn't a Generally Accepted Accounting Principle. Buyers must ensure the same assumptions are used for every company they study.
Ratio analysis provides further general information about a target company's financial performance trends. It's up to the buyer to interpret these ratios according to its acquisition needs.
For example, the current ratio represents a company's ability to meet its near-term obligations and is calculated by dividing current assets by current liabilities. The general rule of thumb for a current ratio is 2:1, and a ratio lower than 1.1 is usually considered risky.
A financial buyer might be wary of a low current ratio because it could hamper its ability to realize a short-term return on investment. Strategic buyers may be more forgiving of a lower number if the company has other desirable traits, such as unique products. …