582 Making Key Strategic Decisions
place and have there been previous acquisition attempts? If so, how have they
fared? For a private company, there should be some attempt to discern how
likely the owners are to sell. Information about the recent performance of the
firm or the financial health of the owners may provide some insight.
The original list of potential acquisitions can be shortened considerably
by using these criteria. The companies on this shortened list should be first an-
alyzed assuming they would remain as a stand-alone business after the acquisi-
tion. This analysis should go beyond just financial performance and might
include the following criteria:^14
Other popular tools for this analysis include SWOT (strengths, weak-
nesses, opportunities, and threats) analysis, the Porter ’s Five Forces model,
and gap analysis. Once this process is completed, the potential synergies of
the deal should be assessed using the approach presented in the previous sec-
tion. The result will be a list of potential acquisitions ranked by both their po-
tential as stand-alone companies and the synergies that would result from a
combination.
Cash versus Stock Deals
The choice of using cash or shares of stock to finance an acquisition is an im-
portant one. In making it, the following factors should be considered:
- Risk-sharing:In a cash deal, the target firm shareholders take the money
and have no continued interest in the firm. If the acquirer is able to create
significant value after the merger, these gains will go only to its sharehold-
ers. In a stock deal, the target shareholders retain ownership in the new
firm and therefore share in the risk of the transaction. Stock deals with
Microsoft or Cisco in the 1990s made many target-firm shareholders
wealthy as the share prices of these two firms soared. Chrysler Corporation
Future Performance Forecast
Growth prospects
Future margin
Future cash f lows
Potential risk areas
Key Strengths/ Weaknesses
Products and brands
Technology
Assets
Management
Distribution
Industry Position
Cost structure versus competition
Position in supply chain
Financial Performance
Profit growth
Profit margins
Cash f low
Leverage
Asset turnover
Return on equity
Business Performance
Market share
Product development
Geographic coverage
Research and assets
Employees