00:23
Faizan
Mergers and acquisitions happen for a lot of reasons - not all of them good. This article will highlight some of the main reasons companies buy and get bought.
I once worked in a company where there was a ton of cash being thrown off by a strong product in a strong market. The CEO was under pressure to 'deploy the capital' rather than have it pile up in the bank (although Apple seems to have used this strategy effectively). To make a long story short, an ill-considered decision was made that squandered the vast majority of our cash reserves. Did it kill the company? No, but the mistake eliminated many other more profitable alternatives including some things that could have accelerated our core business, and the new business turned out to be an expensive distraction.
So what are some good reasons for M&A? First it depends if you're a buyer or a seller, and then if you're a buyer, whether you're a strategic buyer or a financial buyer. Sellers might sell for any of the following reasons:
Owner is tired and wants to cash in
Owner senses the business is in a strong position and he can maximize its value
Owner sees that an acquiring company can provide the strong brand, sales channels, or financial muscle needed to accelerate growth
The technology and/or patents of the company are a good fit with the needs of a larger player in the space
The company provides access to key customer relationships coveted by a larger company
The company is losing money and needs to liquidate
The owner sees a downturn coming in the future and wants to sell now to get the best price he can now
A financial buyer typically has capital to deploy and is looking for ways to create higher shareholder value - that is, getting a better return on invested capital than is possible in static financial institutions. They will be looking for attractive companies in attractive markets where they can see a good investment hypothesis:
Combining two or more smaller players in a field into one larger more efficient one
Taking one big company and spinning off smaller ones for a higher overall valuation
Eliminating waste and improving efficiency via proven processes to raise operating profit
Adding talent to improve the effectiveness of a struggling company in a good market
Accelerating sales growth via improved processes or geographic expansion
Adding necessary capital to update facilities and equipment to compete more effectively
A strategic buyer is one that is in the same or related markets as the target. Strategic buyers are looking to:
Find 'bolt-on' companies (those in served markets) that can increase and consolidate share position
Add desirable IP, sales channels, geographic reach, or key customer access to an existing business
Expand into adjacent attractive market segments
Reduce the cost necessary to serve an existing market
Add accretive sales growth or operating profit
I once worked in a company where there was a ton of cash being thrown off by a strong product in a strong market. The CEO was under pressure to 'deploy the capital' rather than have it pile up in the bank (although Apple seems to have used this strategy effectively). To make a long story short, an ill-considered decision was made that squandered the vast majority of our cash reserves. Did it kill the company? No, but the mistake eliminated many other more profitable alternatives including some things that could have accelerated our core business, and the new business turned out to be an expensive distraction.
So what are some good reasons for M&A? First it depends if you're a buyer or a seller, and then if you're a buyer, whether you're a strategic buyer or a financial buyer. Sellers might sell for any of the following reasons:
Owner is tired and wants to cash in
Owner senses the business is in a strong position and he can maximize its value
Owner sees that an acquiring company can provide the strong brand, sales channels, or financial muscle needed to accelerate growth
The technology and/or patents of the company are a good fit with the needs of a larger player in the space
The company provides access to key customer relationships coveted by a larger company
The company is losing money and needs to liquidate
The owner sees a downturn coming in the future and wants to sell now to get the best price he can now
A financial buyer typically has capital to deploy and is looking for ways to create higher shareholder value - that is, getting a better return on invested capital than is possible in static financial institutions. They will be looking for attractive companies in attractive markets where they can see a good investment hypothesis:
Combining two or more smaller players in a field into one larger more efficient one
Taking one big company and spinning off smaller ones for a higher overall valuation
Eliminating waste and improving efficiency via proven processes to raise operating profit
Adding talent to improve the effectiveness of a struggling company in a good market
Accelerating sales growth via improved processes or geographic expansion
Adding necessary capital to update facilities and equipment to compete more effectively
A strategic buyer is one that is in the same or related markets as the target. Strategic buyers are looking to:
Find 'bolt-on' companies (those in served markets) that can increase and consolidate share position
Add desirable IP, sales channels, geographic reach, or key customer access to an existing business
Expand into adjacent attractive market segments
Reduce the cost necessary to serve an existing market
Add accretive sales growth or operating profit
Posted in: business
