18th April, 2018
When a business reaches a certain size, a merger or acquisition can look attractive. What are the triggers for businesses to get into the game?
Let’s say that you’re well and truly out of startup mode – your business now has great cash flow and revenue outlook.
Do you plough cash into R&D to innovate and attract more customers or draw them in by boosting your marketing efforts?
Larger businesses sometimes make the acquisition move to turbo-charge growth that remains elusive with their business-as-usual activity.
So, when is it time to consider acquisition?
Businesses see acquiring a key supplier as a natural choice to cut their costs over time.
Everything you buy from a supplier has a margin attached, so is there a chance to acquire your supplier and become a more vertical company?
As a double bonus, you’ll be buying a business that could have a positive impact on your bottom line.
Vertical integration can be a massive benefit to companies and there are countless stories of vertical integration being key to more profits.
Spanish retail giant Zara makes about 60 percent of its products – it can keep its costs down and change stock on a whim.
Expanding to new markets and territories can be expensive if you want to start from scratch.
Some companies simply buy an existing complementary company that sells to their target market and use it as their distribution arm.
This is the case for New Zealand retailer Kathmandu which recently bought one of its suppliers to expand its US footprint.
It made sense for Kathmandu, with its own clothing label, to explore the acquisition potential of Oboz Footwear, with its state-side retail infrastructure.
The first win is buying an existing business that has its own revenue line. This move effectively pays most of the upfront costs when setting up in a new market.
Sometimes a business has a piece of tech in development that would make your business go to the next level. But the tech is locked up in IP protection.
It’s likely when you approach another company about using their tech for your business, you’ll face paying a white labelling fee.
This can cost a lot more money than you intended. Or worse, the tech company can withdraw from the arrangement, leaving you high and dry.
Why not make the tech your own by acquiring the company that holds the patent?
There are many examples of this acquisition move. Not many people remember that Apple acquired Siri eight years ago.
Siri is now seen as part and parcel of the Apple suite of software. But if Apple hadn’t bought it, Siri’s maker may have been sold to another company or faded into obscurity.
Sometimes in business, you just want to take a piece off the board.
You may be an established company, and suddenly there’s a new (or old) competitor eating into your market share.
If you see a zero-sum game arise from the competition between you and your challenger in the market, a merger could benefit both businesses.
Post-merger or acquisition, the company’s bigger position can equal a larger market share than it had previously.
Regulators like the ACCC or Commerce Commission have a role to play here. They determine whether the merger or acquisition will result in one company having too much market power. It’s important to take this into account before you commit.
Look at how the ACCC and Commerce Commission have ruled on similar mergers in the past. The ACCC has a handy merger guide here.
Another reason a company may look to merge or acquire is to create a company in different yet complementary industries.
A company that produces staplers may look into acquiring a company that creates staples. They are two different verticals, but are highly complementary.
For example, in 2005 Procter & Gamble acquired Gillette in a $57 billion stock deal.
At the time, P&G sold hair and skincare products for women while Gillette focused on grooming products for men.
Those are two different businesses, but in highly complementary vertical businesses.
The key is to watch where the pieces are moving on the board to make your play.