The nature of strategic value is that it directly impacts on the ability of a large corporation to achieve its strategic objectives. Thus any threat to its existing business needs to be countered with a solution. This is often acquired from outside the corporation if the price is less than the loss which would be incurred without the acquisition.
Large corporations don’t just make acquisitions to solve problems, we should be alert to the fact that most large corporations buy in their revenue generating innovations. Thus a small company which can offer an innovation which enables a large corporation to generate significant new revenue would be an attractive acquisition as long as the investment provided a healthy return.
Note that in both these situations the strategic value of the acquisition is related to the problem or opportunity being addressed by the acquirer not the conventional financial value of the business being acquired. This is the key to extracting a premium on sale.
One approach for finding the right strategic acquirer is to find a potential buyer who has a serious problem you can solve. This may seem simplistic but there are countless acquisitions that are made for exactly this reason. The task of the seller is to be proactive in seeking out corporations where the firm can take away a serious problem or threat. Those targeted potential acquirers that have a serious problem which can be resolved by the selling firm should offer a significant chance for the selling firm to achieve a premium on the sale of their business.
To better understand the circumstances that drive this type of acquisition, think of the ‘problem’ as a threat that might be solved, mitigated or reduced and where the threat is seen by the corporation as a potential or actual reduction in current or forecast revenue if no counter action were taken. Normal business life is littered with such threats stemming from price wars, introduction of new technology, new legislation, loss of a major distribution channel and so on. The ‘problem solving’ approach to making a strategic sale of a business is to be able to identify situations in which the firm’s assets or capabilities can counter an existing or emerging threat for a corporation that has both the capacity and willingness to enter into an acquisition.
External threats occur when the corporation has no effective control over the event, however, it will impact on their ability to compete or execute if no counter action is taken. The other from of threat is from internal situations which disrupt the business, reduce capability or create a change in its future intentions.
external threats: (examples)• Major customer defaults
• Major supplier defaults
• A major supplier is likely to be purchased by a competitor
• New competitors enter the market
• A competitor introduces a more advanced product
• Current competitor becomes more effective
• Change in legislation
• Disaster (natural or terrorist)
• Loss of major contract
• Loss of distribution channel
• Changing customer buying patterns
internal threats: (examples)
• Loss of key employee
• Lack of funding
• Major delays on product development
• Serious personal health or family issues of senior executives
• Urgent need to buy out investor or partner
• Need to liquidate to retire
In 1984 Pioneer Computer Group (PCS) utilized a 4th generation language from North County Computer Services (NCCS) in Escondido, California. At the time the language, USER11, ran on the RESTS/E operating system on the Digital Equipment Corporation’s PDP 11/70. With the introduction of the VAX series of computers, the USER 11 product was ported over to the VAX to provide an identical programming and end user environment. However, this failed to use any of the new features inherent in the VAX and thus PCS faced a decline in its market acceptance. NCCS were determined to stay with a transparent interface thus threatening the survival of the PCS applications written in USER 11. To solve the problem PCS raised $1.5 million in venture capital, acquired NCCS and rewrote the USER 11 product to utilize the advanced features of the VAX.
Source: Dr. Tom McKaskill, Former CEO, Pioneer Computer Systems AGERE SYSTEMSacquired Massana rather than let their initial investment be lost.Agere Systems announced Monday the acquisition of an Irish semiconductor-maker that designs broadband network chips that are 10 times faster than current technology.
The startup has only produced a prototype, which several companies are sampling, including possibly Cisco Systems and Apple. The privately held company has not turned a profit. It has received about $30 million from U.S. and overseas venture capital firms. Agere will have to inject cash to cover research and employee salaries, without revenue coming in immediately. It will assume a small amount of debt.
The Dublin company is a startup venture founded in 1996 that began as a provider of engineering services. It has collaborated with Agere for the last year on developing gigabit Ethernet chips used in high-speed broadband networks. Agere produces chips for slower speed Ethernet connections. Massana was on track to fulfill its contract, but Agere decided it wanted more control over the project so it decided to buy the company, said Sohail Khan, executive vice president of Agere’s Infrastructure Systems.
Source:http://www.mcall.com/business/ accessed 7th September 2003CHINADOTCOM acquired Ross Systems Inc., a supplier of ERP systems. Ross Systems had a history of poor management which made them vulnerable to takeover. Chinadotcom may have decided to acquire rather than let them pass into a competitor’s hands.
Example: (Author’s italics)ATLANTA (Dow Jones)–Chinadotcom Corp.’s CDC Software unit signed a definitive agreement to acquire Ross Systems Inc. (NasdaqNM:ROSS- NEWS) for $5 in cash and $14 worth of chinadotcom common shares.
In addition, CDC Software has been a master distributor of Ross Systems’ enterprise business solution, iRenaissance suite, in the Greater China region.
Source: http://www.rosssystems.com/ accessed 6th September 2003In early 1998 SAP announced a suite of supply chain optimization products replacing their alliances with a number of small software companies. Within a few months their major competitors including Peoplesoft, J D Edwards, Oracle and Baan all made similar announcements. However, these were mostly development initiatives and not completed products. Peoplesoft took the opportunity in late 1998 to acquire a small software house, Distinction Software Inc. which had a complete suite of products in order to counter the move by SAP.
Source: Dr. Tom McKaskill, former CEO, Distinction Software Inc.Solving a serious problem, negating a threat, overcoming an obstacle, or removing a constraint are ways in which the selling firm can offer strategic value to the acquirer. The buyer needs to see value beyond that which is represented by the earnings on the seller’s income statement. It is by creating this additional or ‘strategic’ value that the seller can achieve a premium on the sale of the business.
Most business owners know their industry and understand their own competitive position. Within their business they will have assets or capabilities which provide them with a competitive advantage. We can think of these as ‘things we own’ and ‘things we do’. The process of seeking out strategic buyers based on solving a problem is to think of how other businesses would use the competitive assets or capabilities of the firm. Those businesses that could use these assets or capabilities to overcome a problem or threat are target acquirers.
Example:In 1990 the owners of Pioneer Computer Group (PCG) decided to sell their software firm. They had 160 staff over three locations; Northampton and London in England and San Diego in California. They developed 4th generation languages for the PDP/11 and VAX computers and then used these languages to develop ERP systems for discrete and process manufactures. After investigating the UK for potential buyers, they were disappointed in the low valuations and turned their attention to the USA. There they found Ross Systems Inc. that was also using the VAX computer but using a 3rd generation language and only selling corporate financial systems. Ross recognized that their future looked bleak unless they could compete with new software technology and gain access to a larger market. PCG’s successful approach to Ross was to show how they could provide ROSS with a new development capability and enable them to enter a growth market in the manufacturing sector. The sale was 200% higher than the valuation they could have achieved in the UK.
Source: Dr. Tom McKaskill, former CEO, Pioneer Computer GroupFinding the strategic buyer can take some time. The buyer must have both the need and the capability to buy. Often external circumstances provide the impetus for such a need. In the ‘problem solving’ scenario, it requires a search for corporations that need what the firm has which could overcome a problem or threat, however, few corporations publicize their threats. A well networked industry executive may be able to spot opportunities but generally it requires some systematic approach to cultivating relationships where such situations are discussed. Sometimes it just requires boldness to initiate discussions with industry firms to discover where a strategic fit might occur. Generally it is only by participating in industry and professional networks that a firm will find out about a corporation with a problem which they can eliminate or reduce.
Most acquisitions are made to take advantage of synergies that can be leveraged through combining the businesses. The most attractive of these scenarios is where the acquiring corporation can leverage the acquired assets or capabilities to open up new markets and/or generate significant new revenue.
A business is faced with an opportunity when a favorable set of circumstances is presented in which they are able to achieve an increase in revenue. Opportunities are often situation and time specific. An opportunity for one firm may not be open to another due to the knowledge possessed or the assets or capabilities needed to execute to deliver the benefits. Opportunities are almost always driven by a change in some aspect of the external environment. It is the business which can exploit that change which will generate new revenues.
Opportunities:• Changing needs of customers
• New legislation
• Failure of competitor
• Disaster (natural or terrorist)
• New solutions to old problems
• Dramatic improvement in product utility or functionality
• Significant reduction in cost of a product or service
Often large corporations see external opportunities but do not have the assets or capabilities to take advantage of them. This is fertile ground for small companies who have products or services which can be used by large corporations to pursue such opportunities.
The reward for the acquiring company is to take advantage of an opportunity by utilizing the acquired assets or capabilities. The objective of the selling firm is to identify the match between what they have or do with the capabilities and capacities of a large corporation in order to identify which corporations can clearly exploit one of these opportunities through an acquisition. To the extent that the selling firm is more able to provide the solution (better fit, more timely, less problems in the acquisition), or more able to enhance the opportunity (fit, scalability, less problems in the acquisition), the better the price that can be negotiated.
Opportunities can often be very large in potential returns if circumstances permit. Here the key to the price the buyer may be willing to bid is scalability of the opportunity and rarity of the solution. The more the activity can be scaled, the greater the potential financial reward to the buyer. The seller is in a more powerful negotiating position if theirs is the only possible solution. This may be a factor of location, timing, size, culture, technology and so on.
Opportunities can be described using the business development matrix:
Increase Frequency Increase Margins Cross Sell
New Business CreationIncrease Frequency Increase Margins Cross Sell
Expand Markets New Customers
The challenge for the seller is to show how their assets and /or capabilities can leverage additional business in one or more of these market development areas.
Enhancing Existing Products/MarketsThe seller may provide the capability for the corporation to reduce costs and/or enhance the sales value of their existing products thereby increasing margins. This may be through technology, better processes or capabilities in sales or marketing. Additional benefits may come from combining operations to gain lower cost through economies of scale or learning curve effects.
Increased customer penetration or frequency of use may come from finding additional uses of an existing product by incorporating new components, replacing components, changing packaging or changing the marketing messages. The seller may be able to show how their technologies, processes or knowledge may enhance existing products to create new business within existing markets.
San Jose, CA, July 8, 2003 -- Pericom Semiconductor Corporation (Nasdaq National Market:PSEM) today announced that it has signed a definitive purchase option agreement to acquire the net assets of privately held SaRonix LLC of Menlo Park, CA., subject to the completion of due diligence and customary closing conditions. SaRonix and Pericom are executing joint marketing and product development initiatives for crystal based products including clock recovery, frequency translator and timing modules.
The acquisition will add to our core competencies by enabling technologies for new products, enhancing customer service and streamlining value added solutions for the combined customer base. Both Pericom and SaRonix focus on the computer, networking, telecom and storage markets, have many common major customers and complementary geographic strengths
Source:http://www.pericom/corporate/ accessed 8th September 2003A very common reason for an acquisition is to reduce costs through new technologies or to build additional differentiation or competitive advantage into existing product offerings.
Example:Inxight acquires Information extraction technology nxight Software, a leading provider of software solutions for accessing and using unstructured data, announced that it has acquired the technology assets of WhizBang! Labs, of Provo, Utah.
The strategic acquisition, the first following the company’s recent $22 million investment round, extends the company’s text analysis, classification and retrieval capabilities.
“This technology acquisition demonstrates our commitment to providing the most powerful solutions for accessing and understanding corporate data assets” says John C. Laing, Inxight’s president and CEO.
“Combining the acquired functionality with our existing technology enables us to better serve customers, expand our market share and serve notice to the Unstructured Data Management market that Inxight truly is determined to dominate.”
Source:http://content-wire.com/taxonomies/index. cfm?ccs=82&cs=2328 Accessed 18th February 2006The potential acquisitions are targeted on the basis that they should bring synergies to ComOps’ existing businesses, both in terms of cost savings and, more importantly, in revenue opportunities created by enhancing our product offerings to our already long list of quality clients together with new customers.
Source: http://www.comops.com.au/client_images/330102.pdf Accessed 22nd April 2008 New Products to Existing CustomersMany acquisitions are made by corporations to acquire products which they are able to sell through their current distribution channels to their existing customers. Expanding the portfolio of products can be very cost effective as relationships with customers are already in place or their brand is already known. Creating differentiated products through an expanded solution set may be a very effective hedge to competition. Alternatively, adding complimentary products may allow corporations to increase their penetration into existing market sectors.
South African industrial services group Bidvest (BVT) will continue to look for acquisitions in South Africa and abroad to expand its service offerings.
Executive Chairman Brian Joffe said on Monday that Bidvest remains acquisitive by nature and committed to expanding its distribution, services and trading strategy.
“Bidvest uses acquisitions not to achieve breakthrough, but rather to accelerate momentum. Finding the right acquisitions at the right price and at the right time requires skill and patience.
Source: http://www.bday.co.za/bday/content/direct/ accessed 7th September 2003“This acquisition is a significant investment which reinforces and expands our emphasis in security related products,” said HPIC’s Chairman/CEO, Kim Kelley. “Keeper adds cargo management capabilities to our collection of branded, high value, easy-to-use security hardware and related accessory products for the home, vehicle and workplace. In the first year alone, Keeper’s sales will represent about one-third of Hampton’s overall sales.”
Source:http://www.theautochannel.com/news/2006/01/23/208192. html Accessed 18th February 2006The selling firm may have access to a customer base where the buyer has none or little presence. This could be a new geographical area or a new sector. Often firms buy their competitors for this reason. They can then switch the customer solution across to their own products providing economies of scale benefits as well as taking out a competitor.
This strategy is also used to increase coverage within a sector, especially for expansion overseas where the buyer will be acquiring a presence in a market and thus access local knowledge, local capability, a distribution channel and achieve critical mass. This strategy can be especially effective where the selling firm has a very large customer base but few products. A corporation that has a wide range of products that can be sold to an acquired customer base is effectively buying a readily developed channel to market.
Another form of expansion is to find a new mission for existing products by selling into a different sector where the product might be used differently. Often with this type of acquisition, the buyer is seeking to acquire knowledge of the sector. Every market has its own ways of doing business. Acquiring a firm, for example, that undertakes government contracts, would allow a firm to acquire deep knowledge of how to secure new business in that sector.
Example:Lion Nathan’s $10 million acquisition of its third brewery in China earlier this month confirms its plans to expand in the world’s largest beer market despite $230 million of cumulative losses. The acquisition which will make Lion the largest brewer in the town of Changzhou.
Situated between Nanjing and its existing brewery in Wuxi, the Hua Xia brewery in Changzhou is Lion’s latest move in a strategy of expanding its foothold in the rich Yangtze River Delta region.
It will not only give Lion access to some 22 million litres of capacity in the city, where the brewery markets the Linkman beer, but will make it easier to sell its other China brands in the region. The China business is on the look out for more acquisitions in the Yangtze River Delta.
Lion Nathan bought a brewery in Wuxi, 120km northeast of Shanghai in 1994 after a two-year search for an acquisition in China. Lion Nathan access to the biggest beer brand in the city, called Taihushui.
Lion Nathan is now looking for more acquisitions like the Changzhou deal which will give it access to more markets in the region.
Buying a local brewery is as much about buying access to the local beer market which is often fiercely protected by local business and political interests.
Lion wants to continue to expand volumes and seek the market dominance that brings more control over pricing.‘Moreover, etalk’s customer base of over 1,500 contact centres and 35 of the Fortune 100 companies will gain access to the world’s leading technology, offering them a competitive edge over any other solution, based on Autonomy’s unique ability to understand the content of the call.’
Source:http://www.cambridgenetwork.co.uk/pooled/articles/BF_ NEWSART/view.asp?Q=BF_NEWSART_156736 Accessed 18th February 2006
Cross Selling of Products to Both Customer BasesThe selling firm may have a set of products that can be sold into the existing distribution channels of the acquiring corporation. At same time, the buying corporation may have products that are able to be sold back into the customer base of the firm being acquired. Such an acquisition is especially attractive where little additional resources have to be expended to introduce the new products into the existing distribution channels. In these situations, the return on investment for the acquirer can be especially high and the payback on their investment relatively short. The selling firm that can clearly articulate this opportunity is well positioned for an acquisition.
This strategy can also used to effect an entry into a new market where local knowledge and local products can be readily enhanced with the corporation’s own set of products. At the same time, the acquired products can be brought back to benefit the corporations existing distribution channels.
Example:San Jose, CA, July 8, 2003 -- Pericom Semiconductor Corporation (Nasdaq National Market:PSEM) today announced that it has signed a definitive purchase option agreement to acquire the net assets of privately held SaRonix LLC of Menlo Park, CA., subject to the completion of due diligence and customary closing conditions. The transaction is expected to
Both Pericom and SaRonix focus on the computer, networking, telecom and storage markets, have many common major customers and complementary geographic strengths
Source: http://www.pericom.com/corporate/ accessed 8th September 2003Software mergers are notoriously difficult to pull off, from both technology-integration and go-to-market perspectives. PeopleSoft certainly said all the right things: its products and customers seldom overlap, its sales force is in training and is ready to go, it will realize more than $200 million in merger-related cost savings and some of the most popular products will be integrated by year’s end.
Even if the truth is a little less optimistic, a stream of PeopleSoft executives made a compelling case for a successful integration. Indeed, PeopleSoft focuses mainly on sales to large companies while J.D. Edwards’ expertise is in the mid-market, or companies with $1 billion or less in revenue. According to Phil Wilmington, executive vice president of PeopleSoft’s Americas business, that means more cross-sell and up-sell opportunities. “More products mean more revenue,” he says.
Michael Gregoire , head of services at PeopleSoft, says “JD Edwards looks like PeopleSoft did three years go.” He says only one-quarter of JD Edwards sales come from existing customers. “This is too small. They need to upgrade.”
Surce:http://forbes/2003/09/05/ accessed 7th September 2003While merged businesses may have their own niche markets, they can often have parts of their operations which are similar. These areas would provide cost synergies in additional to the revenue opportunities of cross-selling.
Example: (Author’s italics) Also buying their way deeper into EBPP are InteliData andAvolent. The former announced earlier this month that it is acquiring Home Account Holdings Inc., of Emeryville, Calif., its Home Account Network Inc. subsidiary and its suite of Unix-based Internet banking and EBPP products.
InteliData, of Reston, Va., already offers remote banking services to financial institutions. The deal gives the company a broader customer base—including credit card issuers— and a fast handle on Home Account’s current client roster, including some of the country’s top financial institutions, such as Bank of America Corp., Citigroup Inc. and First United Corp.
Source: Acquisitions help spur EBPP ,By Renee Boucher Ferguson January 22, 2001,http://eweek.com/ accessed 6th September 2003For instance, Gupta said, by the fourth quarter, J.D. Edwards’ real-estate management tools will be available to PeopleSoft customers. The latter, as a group, own more than 5 billion square feet of real estate, said Gupta. “Talk about an opportunity,” he added.
Conversely, Gupta said J.D. Edwards users will soon have access to PeopleSoft’s supplier-relationship-management tools. Gupta said J.D. Edwards customers spend more than $50 billion annually on procurement.
Source: http://www.internetweek.com/breakingnews/ accessed 7th September 2003This type of acquisition is an expansion strategy where the firm desires to break into a new sector but requires a new capability to do so. This could be in a related sector where there is some commonality in market approach or could be in a very different sector where the firm has no synergy to leverage. This strategy is often used by firms aggressively seeking growth or by companies trapped in declining sectors and needing to find new sources of revenue.
Example: (Author’s italics)eTime Capital Inc., InteliData Technologies Corp. and Avolent Inc. are acquiring companies to jump-start their respective EBPP offerings, while iPlanet E-Commerce Solutions and MetraTech Corp. have announced EBPP additions to their applications.
EBPP lets companies send bills over the Internet to business and consumer customers and allows those customers to pay online.
eTime Capital, which provides transaction reconciliation and settlement services, will announce this week its acquisition of Dynamic Transactions Inc. The purchase of DTI, best known for its PayPlace service, which settles payments between online buyers and sellers, will propel eTime Capital into the EBPP space and shave months off product development time,according to officials of the Sunny