Saturday, June 20, 2009

9 Reasons Why Buyers make Strategic Acquisitions. Your Business Growth Strategy through Acquisitions.

Reasons Buyers Buy

Buyers have a number of motives for making acquisitions. They may use an acquisition as a way to gain new technology or new products and service capabilities. Acquisitions can be a good way to add customers or talent, such as an engineering or development team. An acquisition can provide a buyer with intellectual property, know‐how, and patents. Acquisitions can also be an inexpensive and fast way to enter a market and capture market share, or add a brand name and a new geographic presence.

New and unique technologies are often created by smaller companies; however these firms frequently struggle in taking the technologies and the products that embody them to market. Small companies are pretty good at developing technology, but not so good at successfully selling the product or the service.

Let's briefly review each of the asset categories that acquirers find attractive in making strategic acquisitions:

 New Products and Services—More acquisitions are made to acquire new products and services than for any other reason. Buyers can sell the target's products and services through their existing sales channels.

 New Technologies—Buyers use acquisitions as a way to capture newly developed technologies that they can incorporate into their own products. These products could be existing products or new products that the company is developing. Acquisitions to obtain technology are most common in the early phases of a market's development. In a late stage or consolidating market, acquisitions are rarely made to obtain technology.
Most technologies can be used in a variety of ways. Technology developed for one market may be utilized in other markets. For example, one company that we sold had developed innovative software for caching data on a hard disk. The software organized the movement of data in a clever way and improved the effective speed of data transfer. As a result, it improved the speed and performance of a personal computer. It turns out that this technology and its algorithms also worked well for caching data on compact discs (CDs) and other storage media. We sold the company to a firm that manufactured CD drives. The manufacturer benefited because this software enhancement enabled its CD drives to transfer data at a faster rate than competitors’ drives. This example is typical of many types of technology that can be used in different applications.

 Additional Customers—Buyers always benefit by bringing additional customers onboard. In the consolidation phase of a market, customers are the primary reason that acquisitions are made.

 Engineering and Development Teams—Talent is a key asset for most intangible companies. As buyers expand they discover that it is often difficult to hire enough good people. Acquisitions can be a great way to bring talented people on board.

 Increased Capabilities—Capabilities include resources such as consulting talent, sales teams, or other service‐oriented resources. These resources give the acquirer the ability to deliver new and additional services to its customers.

 Distribution Channels—Acquisitions can enhance a buyer's distribution channels. We completed one transaction in which a European buyer acquired a U.S. company to add to its product line but more importantly to increase its distribution power in the United States.

 Geographic Location—Acquisitions to obtain a geographic location or presence are not all that common with intangible companies; however in some cases this motive can drive an acquisition. We closed a transaction with an East Coast software company that acquired a West Coast software firm in order to provide better service to its West Coast clients. In another transaction a Canadian firm acquired a U. S. company to gain a foothold in the U. S. market. Generally, these are smaller‐sized acquisitions.

 Gain Mass—Smaller buyers make acquisitions to gain mass—to simply get larger. Usually this means adding revenues and customers. Even if the acquisition is not highly strategic it can be beneficial for a small buyer to grow in size and enjoy greater economies of scale. This may be an odd reason for making an acquisition; however it does happen from time to time. Large buyers rarely make acquisitions to gain mass. The motivation to make an acquisition to gain mass is probably most common among very small buyers, typically with revenues under $30 million.

 The Price is Right—Sometimes a buyer will make an acquisition simply because the price is extremely attractive. It may not be a must‐have acquisition but at a low price it is a good deal. The acquired assets are usually “nice to have” technology or a “nice to have” customer base; they are not critically important assets. These deals are very price sensitive. This type of acquisition is an inexpensive way for an acquirer to gather assets that are at least of moderate value.



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