Even a business which is running smoothly, operating at a profit and providing the owner with a comfortable salary, may not be extracting the maximum value from its resources. In the hands of a different owner, underused and unexploited assets and capabilities might generate significant revenue. The acquirer may be able to bring new energy, increased funding, new distribution channels and complementary skills to the situation thus releasing untapped potential.
We need to have a way of isolating the strategic potential of the underlying assets or capabilities, often in isolation of what the current business is doing with them.
One exercise which is worth doing is simply to look inside the business and list all the things which the firm has or does which could be leveraged into creating significant value for a potential acquirer. Try asking these questions:
If we didn’t have that asset or capability, where would we be competitively and financially?
What do we have, or do, which some other firm would find attractive or
which another firm could leverage much more than us?
What constraints do we have on our ability to grow which another firm in our sector does not have? How could they develop our potential if that constraint were removed?
Strategic acquisitions are undertaken to leverage off an asset or capability of the seller. This would normally imply some level of scalability of the activity associated with the strategic asset or capability. If you can foresee this as a likely path, how easy will it be for the buyer to exploit the potential?
Assume you were given the resources to generate 10 times the revenue from your products or services. What would you have to do to build the capacity to support that level of activity? What resources would you have to put in place to get started? Would you be able to clearly articulate what would need to be done if that opportunity were to present itself? Now, which corporations already have the capability and capacity to provide the environment to quickly reach that target?
When you start to look at what constrains your business, you can see what a possible buyer could do to release the potential.
If you had the resources to grow faster, which products or services would you choose to concentrate on?
What you are looking for are products or services which can generate significant revenue. Why did you choose those specific ones? What was there about them which encouraged you to choose them rather than others?
Another technique you can use is to review a conventional list of intellectual property or intellectual capital to identify what exists within the firm. That list will include patents, brands, copyrights, licenses, rights, trademarks and other registered IP as well as areas of deep expertise or competence.
When you are examining the various forms of assets and competencies of the firm, think about how these might be leveraged by a large corporation.
Corporations can sometimes be frustrated in expansion plans within a sector through the lack of intellectual property. This might be a license to operate, a recognised brand or access to technology which is protected by patents. A lack of such rights when competitors have rights or acceptable alternatives can be a threat to future revenues.
In areas of emerging knowledge, the number of experts or specialists with deep technical expertise or specialist knowledge is often limited. If competitors have such expertise and are leveraging it to gain market share, a corporation is threatened unless they can also acquire such expertise.
Sometimes the only way for a critical mass to be acquired quickly is to buy a firm which already employs such people or has developed such capability.
Example:
“Eastman Kodak Co. Monday announced plans to buy two companies that make digital printing systems and said the acquisitions would reduce its 2004 earnings. For Kodak, whose shares were down 3.6 percent in early trading, the deals are part of a drive to invest more in digital imaging. The company has been hurt by the waning film market”
Source: https://www.forbes.com/newswire/2004/03/08/rtr1290006.html. Accessed 7th April 2004
Often in a specific sector, the ability to compete may depend on owning a share of a channel or access path. If, for example, capacity within a channel is only able to grow at a limited rate, the corporation which has control over part or all of that capacity has considerable influence over market share. The same logic would apply to a market where existing suppliers have effective control over the market due to high switching costs to their customers of moving to a new entrant.
Example:
‘As part of its expansion plans and strategy to enter the Internet business, Kuoni Travel Group India has acquired Resnet from Traveljini.com, which is an investee company of ICICI Venture, for an undisclosed sum. The acquisition of Resnet from Traveljini.-com is the first and primary initiative in the overall Internet strategy of Kuoni India, the company said in a release. Resnet is an on-line booking engine and a comprehensive reservations solutions provider to the hospitality industry and represents various hoteliers on the GDS and Web platforms.”
Source: https://www.financialexpress.com/fe_full_story.php?content_id=56473. Accessed 7th April 2004
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