What Is a Target Company?
A target company is a participant, either willing or unwilling, in merger and acquisition activity. The target could be a publicly traded company in the stock market or a privately held entity that is being acquired or taken over. Some takeover companies put themselves on the block, or up for sale, in a public manner so that the financial industry can circle the prospect as a potential takeover candidate. Other targets might be the product of a corporate raider who looks for undervalued companies to buy.
When the management team of a corporation decides it's time to sell the business, it may place the company on the block. This is a public way for a target company to let potential buyers know that it's interested in being acquired for one reason or another. Management might tout the merits of the target company in a public statement in an attempt to generate the best possible financial offer for the deal. The value of a target company might be the biggest disconnect between buyer and seller, although there are ways to realistically assign a value to a potential acquisition target.
A potential suitor of a target company might use a price to earnings ratio, or P/E ratio, to value the takeover target. This is a way to compare the target with other companies in the same industry. It is a mathematical equation that includes taking the stock price and dividing it by a company's earnings per share, which is a measure of profits. Then, by comparing the result to similar businesses, the buyer can gain some leverage if the target company is trailing some of its industry peers.
A shareholder activist, which can also be referred to as a corporate raider, seeks to get involved in a company that is believed to be underperforming, or not delivering the best possible value to shareholders. This type of investor has capital to invest and is not usually a welcome intruder on a target company. If the shareholder activist believes that the business model of a company can be improved and that management is not doing the best possible job, this investor might begin buying shares of stock to begin the process. Eventually, after a certain percentage of company stock is owned, the activist might attempt to buy the target company or obtain a seat on the board of directors to gain at least some influence.
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