Strategy: We’ve been acquired-great news!...or is it?

Many founders set themselves a target to be acquired and get a healthy return on their innovation and hard work. In response there are companies who specialize in helping them to be acquired. But is this enough to get the return you hope for? Obviously, the answer is NO. So, what does it take to get the best return?

Firstly, your products and services need to be attractive enough for someone to want to acquire you; but this alone will not assure a good price. To be able to negotiate you really need at least 2 potential bidders in the running. So, what motivates a company to acquire another, and how can you improve your negotiating positions. Let’s face it, this is probably the biggest negotiation of your company’s life!

Acquisition decisions are rarely about the technology itself, but more accurately about what it represents in business terms. Broadly these drivers can be grouped into 4 reasons.

1.       To fill a gap in existing offerings

2.       To move into a new market

3.       For its people

4.       To gain competitive advantage.

Let’s look at each in more detail.

Probably the commonest reason to acquire a smaller company is to broaden the product offering, The reasons can differ from being cheaper and/or quicker to bring to market than through organic growth, or that it represents a tangible way to bring value to existing products, such as an add-in to software. Each has its implications but in terms of preparing for this scenario, the approach will be broadly similar, revolving around alignment, compatibility etc.

Sometimes the acquisition will enable a company to enter a new market. It is unlikely that this will be geographic, but more the type of market such as for the Energy Transition or ESG compliance. In such situations the acquirer may not the expertise or knowledge of the market.

There are several examples of dotcom companies being acquired for the personnel, with the intention of using their considerable skills throughout the organization. In this instance the acquired company may be dissolved into the new company.

The last reason is to gain competitive advantage and can also takes several forms. It could be a way to remove an annoying smaller competitor who was eroding market share and profitability; or it could be a pre-emptive way to block a major competitor acquiring the target company themselves.

It is crucial to try and estimate the motivation of potential acquirers if the target company is to improve its negotiating position. Each of these groups represents activities to be undertaken well ahead of an acquisition exercise, and each designed to improve the negotiating strength of the target company.

The bad news is that this takes time and will have a major impact on the strategic activities of the company as it grows. Lets take a look at an example. This technology company saw a niche for specialist tools in a market sector, and set themselves a 5 year target to be acquired. Working with us, they recognized that it was unlikely that they would be acquired for the people, nor did their technology have the potential to open new markets. Although they were growing they did not represent a serious global threat. They decided therefore that their mostly acquirer would want to complete their product range and would want to block any of their competitors from gaining competitive advantage. They looked at potential buyers who would gain most from their acquisition and they made sure that their own tools were compatible and that they collaborated in several areas. Their intention was to be a major part of the partner’s operations. In order to keep visibility with other acquirers they selected markets where they could take significant market share, and essentially become a nuisance. If they were to be acquired by a competitor this could represent a serious threat. Through this strategy they had at least 2 potential buyers with different motivation to acquire them.

When they finally engaged the services of an acquisition specialist they had already vastly strengthened their negotiating position and had potential buyers in mind.

This process can be highly subjective if you are not careful and for this very reason, we have developed dedicated tools to help the founders go through the process and used this knowledge to embed their actions into their strategy plan. To find out more about the Mbrace Acquisition Attractiveness tool, contact us via the contact page.