This 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:
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 Sunnyvale, Calif., company.
For its part, San Francisco-based Avolent last week said it had completed the acquisition of Solant Inc., which has expertise in business-to-business electronic bill payment, reporting and analysis.
Source: Acquisitions help spur EBPP, by Renee Boucher Ferguson January 22, 2001, https://eweek.com/ accessed 6th September 2003
Many companies pursue a build out policy to offer more products to existing customers as well as to break into new markets.
Example:
SenseStream’s acquisition is the first by Adamind since its flotation in February 2005 and marks a major strategic move by the Company to expand into mainland China, Hong Kong and Taiwan as large amount of monies are being invested in telecommunications infrastructure to cope with demand in the run up to the Olympics in 2008 and beyond. The acquisition is highly complementary with Adamind’s footprint in the region with recent wins in Australia, Philippines and Singapore. It will enable the Company to accelerate its penetration into one of the world’s fastest growing and largest mobile markets, namely, China, Taiwan and Hong Kong.
Source: https://www.adamind.com/press_02_08_06.php/ Accessed 18th February 2006
Example:
Satyam Computer Services Limited announced the strategic acquisition of Citisoft, a specialist business and systems consulting firm for the investment management community. The deal was for $23.2 million, with an additional performance based payment of up to 15.5 million to be paid over three years. Yet the acquisition highlights a pattern that has begun to form, in which offshore firms, once viewed as outsiders, are acquiring companies with more established local presences in the markets they serve.
Source: https://www.a1technology.com/blog/2005/10/satyamcomputer-services-limited.htm Accessed 18th February 2006
The selling firm may have products which the corporation can utilise immediately within its existing distribution channel. This alone may be sufficient to justify the acquisition. A firm which, in addition, has products under development which can open up new markets or technology which can be used over a longer period to enhance existing products from either company, can offer very attractive long term benefits to the acquirer. While the selling firm may not be able to extract a premium for longer term potential, the acquisition may gain greater favour within the acquiring corporation thus ensuring a greater commitment to get a deal completed.
A solution which offers new products to existing customers while opening up new customer sectors can be very rewarding to an acquiring firm. The initial investment can be recovered quickly by selling into the existing customer base while the new customer base is being evaluated and a strategy to penetrate it put into place.
The best position for the seller to be in is to have solutions which play to multiple needs, especially of reducing a threat while offering access to new markets. The threat places time pressure on the buyer while the rewards of new products or new markets allow them to more easily justify a premium price.
Threat solutions can sometimes be resented as the buyer may feel compelled to complete the acquisition but may feel no upside in the deal. Reward deals are more easily negotiated with a premium as the buyer can demonstrate how the investment can be recovered through increased sales.
The key to a strategic deal is to find the match between what the selling firm has or can do with a set of large corporations which either need or can greatly exploit the assets and capabilities of the vendor. In order to optimise this match and determine where the highest sale price can be secured, you need a very good understanding of how to identify strategic assets or capabilities and also an understanding of how to identify the best strategic buyers. We will examine how to identify strategic assets and capabilities in the next chapter.
Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia. A series of free eBooks for entrepreneurs and angel and VC investors can be found at his site here.
Smart Company is the leading online publication in Australia for free news, information and resources catering to Australia’s entrepreneurs, small and medium business owners and business managers.
