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Common acquisition strategies

Strategic acquisitions are not just for large corporates with big bank accounts, they should be top of mind for all businesses looking to take their company to the next level. There are many reason firms undergo strategic acquisitions, but they are generally economic at the core. This post covers off some of the various reasons you could investigate strategic acquisitions and some real-world examples.

Increasing your capabilities

This type of acquisition strategy comes in an array of forms. In essence, the aims here are to extend your research and development opportunities, gain improved manufacturing operations, or to gain access to IP. The capability may not just be a particular department or asset; the capability might come from acquiring a new technology or patent that allows you to improve on your current constraints. Capability acquisitions are some of the most common and beneficial acquisitions and are very common for manufacturing companies, in particular pharmaceuticals and computer tech.  We saw an example of this in May 2017, when Cisco made an aggressive move into the Artificial Intelligence (AI) market. The company acquired the artificial intelligence startup MindMeld for US$125 million. The alternative here, was investing in R&D; but the young, fast-moving MindMeld was doing a better job1.

Market share gains

The key to solid, recurring revenue stream is a strong and diverse customer portfolio. Acquiring a company to solidify your customer portfolio is a common acquisition strategy. More so, market share acquisitions can accelerate your expansion into new markets, or new products. This can also afford you a competitive advantage. A consolidated distribution and marketing network can lead to cost savings and allow you to compete at a higher level. This consolidated distribution or marketing network gives companies a wider customer base practically overnight. An example of this is when New Zealand’s Ebos Group acquired Australian pharmaceutical wholesaler Symbion for $NZ1.1 billion (US$928.4 million). This was an interesting acquisition, as Symbion was actually larger than Ebos in size. But this confirms how lucrative these strategies can be2.

Diversification of products or services

Diversification is another common acquisition strategy, particularly common in the FMCG world. Adding a complementary good or service to your arsenal can provide your company and customers benefits. Once you have built a trusted brand, adding another product, even if not in direct competition, can provide you with cost benefits as doing this from scratch can be expensive. Alternatively, acquiring a trusted brand can rub off on your existing product suite.  More so, sometimes your smaller competitors have a better product, it may be easier to simply acquire them.  We saw an example of this early 2017, when Reckitt Benckiser acquired Mead Johnson Nutrition Company for US$16.6 billion. The transaction doubled the company’s consumer health business and provided management with the world’s leading infant nutrition company3.

Follow Customers and Defensive Positioning

If a firm has strong customer relationships, it is common for these firms to follow their customers. In this example, if you have a customer that is expanding rapidly, you could acquire a company in the space they are expanding. With a guaranteed customer, it will make this acquisition option look attractive. Alternatively, a defensive acquisition is generally when a firm acquires a company simply to prevent a competitor from owning it, or to protect its future market position. Facebook’s acquisition of Instagram is a prime example of a defensive acquisition. They already competed in photosharing, but Facebook saw the trend changing. Not only did they prevent someone else purchasing Instagram, they secured their future in that space. The US$1 billion price tag seemed expensive at the time, where Instagram had just 30 million users and zero revenue. Now, Instagram has more than 600 million users, and many analysts believe it will soon be a multi-billion dollar ad business4.

Replacing leadership and Expanding Talent

Succession issues are a common issue in smaller firms, and sometimes the talent you want works within, or owns, a competing firm. This is common in private, smaller organisations. Sometimes an acquisition can be attractive because of the people it brings with it, such as technology innovators, or an exceptional sales team, or seasoned executives. The most famous example in recent times of this type of acquisition was when Apple purchased Next. Apple purchased Next Software in a $400 million deal, and with it brought former Apple CEO Steve Jobs back to the company he co-founded. If you look at where Jobs went on to take Apple, it was worth every penny5.

Cutting costs and Stabilizing Financials

If two companies have similar products or services, combining can create synergies and cost savings. Let’s look at an example where your capacity is 50%. If you acquire a firm that will push your capacity to 80% you will see economies of scale in action, by way of a reduced cost per good. When the total cost is lowered as the volume increases, the company maximizes total profits. Here, you may want to leverage your balance sheet or incorporate a higher margin business. Stabilising financials is another acquisition strategy. If you have a highly seasonal product or service, an acquisition of a firm with opposite seasonality will help keep your revenue and profit stable throughout the year. This helps with financials if you plan to sell. Amazon’s acquisition of Whole Foods, could arguably sit in most of these acquisition strategies, but groceries are far less seasonal than online shopping and will help it optimize its current distribution network. More so, it gives Amazon a new and more frequent window to interact with customers. This was a massive deal, costing Amazon US$13.7 billion6.

Summary

These strategies are not independent and we encourage you to choose a target that can tick several strategy boxes, if possible. But don’t overdo it. Reaching out to an expert will help; they may be able to see things you will inevitably miss. Whatever your motive, make sure the acquisition fits your company’s goals. Don’t buy for the sake of buying.

 

Citations

 

  • John Mannes, Cisco acquires conversational AI startup MindMeld for $125 million TechCrunch (2017), https://techcrunch.com/2017/05/11/cisco-acquires-conversational-ai-startup-mindmeld-for-125-million/ (last visited Dec 4, 2017).
  • Ebos buys Symbion for NZ$1.1bn (2013), http://www.theaustralian.com.au/business/business-spectator/ebos-buys-symbion-for-nz11bn/news-story/68424965157e9f8123b72e8958343e15
  • David Holohan, Price is right for Durex-to-Nurofen big brand owner Reckitt Benckiser Independent.ie (2017), https://www.independent.ie/business/personal-finance/price-is-right-for-durextonurofen-big-brand-owner-reckitt-benckiser-36290402.html (last visited Dec 4, 2017).
  • Contributor, Facebook Buys Instagram For $1 Billion, Turns Budding Rival Into Its Standalone Photo App TechCrunch (2012), https://techcrunch.com/2012/04/09/facebook-to-acquire-instagram-for-1-billion/ (last visited Dec 4, 2017).
  • Dawn Kawamoto, Apple acquires Next, Jobs CNET (1996), https://www.cnet.com/news/apple-acquires-next-jobs/ (last visited Dec 4, 2017).
  • Kate Taylor, Here are all the changes Amazon is making to Whole Foods Business Insider (2017), http://uk.businessinsider.com/amazon-changes-whole-foods-2017-9?r=US&IR=T (last visited Dec 4, 2017).
Sam Grice
Sam Grice graduated from the University of Auckland in 2012. He holds two Bachelor degrees; a Bcom majoring in Economics and a BSc Majoring in Statistics. On graduation Sam worked for one of New Zealand’s largest investment banks as an Equity Analyst. He covered the Energy and Oil and Gas sectors. Sam is a published author of equity research, and is currently CEO and Founder of a Tech start-up. Outside of work Sam loves sports, and like most New Zealanders loves Rugby. He enjoys the outdoors and completes at least one great hike every year.