The Strategy of Business Acquisitions

I was recently chatting with a business owner who was lamenting the fact that no one was interested in acquiring his business. He started a fintech company that was operating with strong financials and a proven product. He had made scores of great connections in the industry and had been making moves to let people know he was ready to sale. But no one was biting. He had a great company that is going to make a lot of money, but as he desperately sought his big payday, he forgot to ask one important question – what is in the for the buyer?

Regardless of how big the company or how deep the investor pockets are, no one approaches acquiring a business as an impulse buy. Approximately half of all acquisitions will fail, meaning that the anticipated benefits of acquiring the target company will not be realized. Because of the risk, acquisitions have to fulfill a strategic initiative for the buyer. Sometimes a company is trying to get their hands on a new technology or fast track innovation, other times they may be looking to enter a new market or diversify their offerings. No matter the reason, the acquiring company must be able to substantiate value creation from acquisition.

Acquiring companies look for value creation from one or more key areas. First, the combined organization could create value by leveraging resource economies of scale to reduce overhead costs. Second, the acquiring company could acquire new skills from the target company without the expense of acquiring the skills from the market.  Third, the acquiring company is able to improve key financial performance by leveraging the financial performance of the target company.  Finally, the acquiring company may restructure the target company to leverage undervalued assets and divesting redundant or poorly performing assets. For a company that is looking to be acquired, demonstrating value streams to potential acquiring companies is a crucial step in generating interest.