## **Learning Outcomes**

After reading this article, you will be able to: explain the main objectives behind acquisitions, describe the process for identifying and screening acquisition targets, and outline the key steps of due diligence. You will also learn to recognise risks and typical pitfalls at each stage. By the end, you should be able to apply these principles when evaluating acquisition strategies in exam scenarios.

## **ACCA Advanced Financial Management (AFM) Syllabus**

For ACCA Advanced Financial Management (AFM), you are required to understand the acquisition strategy process, its objectives, how suitable targets are screened, and the role of due diligence. For revision, focus on:

- Identifying the motives for pursuing mergers and acquisitions (M&A)
- Evaluating the process for selecting and appraising acquisition targets
- Describing the purpose, scope, and limitations of due diligence
- Recognising potential risks and failure points in acquisition strategies

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which of the following is a typical objective of a corporate acquisition?
   a) Achieving operational decentralisation
   b) Reducing long-term capital investment
   c) Gaining strategic market position or resources
   d) Minimising day-to-day working capital

2. In the acquisition process, what is the primary purpose of target screening?
   a) Final negotiation of consideration
   b) Eliminating unsuitable candidates early
   c) Conducting legal due diligence
   d) Consolidating post-acquisition operations

3. True or false? Due diligence is only relevant for assessing the legal risk of acquisition and not financial or operational risk.

4. List two main categories of information investigated during due diligence.

## **Introduction**

Acquisitions are a common path for corporate expansion, but their success relies on a clear strategic purpose and a structured approach. This article outlines the aims of acquisitions, the methodical screening of potential targets, and the role of due diligence in identifying risks before a deal is finalised. Understanding this acquisition process is fundamental for making sound financial recommendations in the ACCA AFM exam.

## **OBJECTIVES OF ACQUISITION STRATEGY**

An acquisition strategy details why and how a company seeks to grow by purchasing another business. Acquisitions can provide rapid entry into new markets, secure scarce resources, or remove competition. However, every acquisition must have a defined objective aligned with the overall corporate strategy.

> **Key Term: Acquisition objective**
> The specific goal or outcome a company aims to achieve by acquiring another business, such as increasing market share, gaining technology, or realising cost savings.

## Key Drivers for Acquisitions

The most common objectives include:

- Gaining access to new markets or customer bases
- Acquiring valuable technologies, brands, or capabilities
- Achieving economies of scale and reducing costs
- Diversifying products or services to spread risk
- Strengthening competitive position by eliminating rivals

Effective acquisition objectives are clear, measurable, and aligned with shareholder value creation.

## **SCREENING AND SELECTION OF TARGETS**

Once objectives are set, the next step is screening to identify suitable acquisition targets that fit the strategic brief and financial criteria. Screening is essential: pursuing the wrong target is a leading cause of failed acquisitions.

### Screening Criteria

Companies typically define target criteria, which may cover:

- Industry sector and geographic location
- Financial characteristics (size, profitability, solvency)
- Strategic alignment (market presence, technology, culture)
- Legal and regulatory considerations

> **Key Term: Target screening**
> The process of evaluating a group of potential acquisition candidates to identify those most closely matching the acquiring firm's strategic and operational goals.

Screening reduces the field to a shortlist for more detailed evaluation.

### Shortlisting and Preliminary Evaluation

The shortlist is developed by comparing prospective targets against the set criteria. Initial high-level assessment may include:

- Review of public financial statements
- Market reputation and business history check
- Compatibility with the acquirer's long-term aims

Targets that sufficiently match the company's needs proceed to the next stages, such as initial discussions or indicative offers.

## **DUE DILIGENCE IN THE ACQUISITION PROCESS**

Due diligence is a structured investigation of the target before a binding agreement is made. Its purpose is to confirm assumptions, identify risks, and uncover issues that might affect value or jeopardise the deal.

> **Key Term: Due diligence**
> A comprehensive appraisal of a potential acquisition target, undertaken to assess its financial health, legal standing, commercial viability, and operational risks before final commitment.

### Types of Due Diligence

Typical due diligence covers several areas:

- **Financial:** Assessing historical and projected performance, assets, liabilities, and potential financial risks.
- **Legal:** Reviewing contracts, litigation, ownership of assets, and compliance with law.
- **Operational:** Evaluating processes, supply chain, IT, and quality of management.
- **Commercial:** Analysing market position, customer relationships, and future prospects.
- **Tax and Regulatory:** Ensuring all tax liabilities and regulatory obligations are understood.

Due diligence findings are used to adjust valuation, renegotiate terms, or, in some cases, abandon the deal if unmanageable risks are found.

### **Worked Example 1.1**

A listed company wants to acquire a regional competitor to expand its market. After screening 20 local firms, it shortlists two targets that meet size and sector criteria. During detailed due diligence on one, it uncovers ongoing litigation and inconsistent inventory records.

**Question:**
Should the acquirer proceed with this acquisition? Justify your answer based on the due diligence findings.

> **Answer:**
> The due diligence has revealed legal and operational risks: unresolved litigation could create major financial liability, and unreliable inventory data may affect earnings quality. Unless these risks are quantified and mitigated (e.g. price adjustment, legal indemnity), proceeding could harm shareholder value. The acquirer should either negotiate safeguards or reconsider the acquisition.

## **Managing Risks and Common Pitfalls**

Acquisitions often fail if proper attention is not given to risk at each stage:

- Strategic drift: pursuing acquisitions without clear objectives can destroy value.
- Inadequate screening: leads to high post-merger coordination hurdles or unsuitable fits.
- Superficial due diligence: risks unearthing costly surprises post-completion.

### **Exam Warning**

> Candidates often focus too narrowly on financial ratios when discussing due diligence. The exam requires understanding that due diligence covers financial, legal, operational, commercial, and compliance risks. Ensure your answers reflect this breadth.

### **Revision Tip**

_Use a checklist for due diligence areas: financial, legal, operational, commercial, tax, and regulatory. This helps ensure you address all critical risks in your exam answers._

## **Summary**

A robust acquisition process starts with clear strategic objectives, uses screening to identify the best potential targets, and employs thorough due diligence to uncover risks. Each phase is essential to minimise failure and maximise the likelihood that an acquisition will add lasting value for shareholders.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Distinguish the main objectives of acquisition strategy and how they align with overall corporate aims
- Outline the screening process and define key criteria for target selection
- Describe the scope and purpose of due diligence in acquisitions
- Explain common risks and reasons acquisitions may fail
- Apply these principles to exam-style scenarios

## **Key Terms and Concepts**

- Acquisition objective
- Target screening
- Due diligence

Acquisition strategy and process - Objectives, screening, and due diligence