Most acquisitions are made to take advantage of synergies which can be leveraged through combining the businesses. The most attractive of these scenarios is where the buying 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:
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 strategy of the acquiring company is to utilise the acquired assets or capabilities to take advantage of an opportunity.
The objective of the selling firm is to identify the match between what they have or do with the potential opportunities which those assets or capabilities create. They then have to find those large corporation which have the capabilities and capacities to 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 which 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:
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.
The 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.
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. 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: https://www.pericom/corporate/ accessed 8th September 2003
A 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.
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