Strategic Evaluation of Acquisition Targets
President and CEO, CSSP, Inc.
You are considering purchasing another company to accelerate the growth of your business. The company has $10 million in sales and shows a profit of $1 million. Physical assets and cash are pretty low -- only $500,000 and the recent growth rate has been a modest, but consistent 4%. The owner wants $20 million for the company. Is this a good deal for you or not? Should you buy the company?
Obviously, from a purely financial perspective, the above deal doesn't look particularly attractive. There are plenty of resources for evaluating the value of an acquisition target from a financial perspective. In other articles, we have examined the strategic reasons for pursuing an acquisition and factors which will make some targets more strategically attractive for you. In this article, we will take a quick look at the other strategic factors that may dramatically change your assessment of the value of an acquisition target. In my next article, we will look at how to evaluate each of these factors.
There are four factors you will want to consider in evaluating an acquisition:
- Financial value
- Asset value to your company
- Possible resale value of the company and its assets
- Strategic impact on your company
- Market impact
- Technology impact
- Human resource impact
- Distribution impact
- Supplier market impact
We will not spend much time on the assessment of the first three items, because they are well-addressed elsewhere. The fourth, strategic impact can most easily be assessed by deciding to treat the strategic impact as an element of financial value, asset value or resale value -- but this requires making some very specific assumptions.
a. Market impact
Market impact is the effect that combining your company with the target will have on market behaviors. For example, reducing the number of competitors may decrease price competition, increasing margins for the remaining competitors. A combined company may also generate higher value for customers by offering a broader product line, simplifying terms or raising the overall quality and service levels in the market. These will, in turn, enable the acquiring company to strategically shift the competitive dynamic so that market success is dictated by different strategic competencies.
b. Technology impact
Sometimes you may consider an acquisition because the target company owns a technology that will be strategically useful to your company. This is usually strategically valuable when a technology can differentiate your company by helping you meet a specific customer need or preference better than your competition.
c. Human resource impact
In some situations, the human resources of a target company will create value for the acquiring company. While just having warm bodies will only create value in a time of labor shortage (which we saw in technology companies during the dot com boom), it's not uncommon to see specific skilled employees creating a considerable part of the perceived value of the target. For example, insurance agencies may find other agencies desirable because they have a number of skilled and experienced producers. Likewise, in technology, you may want to acquire a company to get a team that is especially skilled in a certain type of software (such as mobile device social media) because the technological competency of the team will help you meet customer needs better -- or even create a wildly differentiated product.
d. Distribution impact
An acquisition target may give you enhanced ability to penetrate a new distribution channel -- or give you the concentrated power to dictate terms to an existing channel. For example, Acco Corporation owns several well-known office product brands, which gives the company increased leverage with powerful office superstore chains.
e. Supplier market impact
Leverage is not restricted to customers and distribution channels -- if you control most of a market, you may also have greater bargaining power with suppliers. This may allow you to dictate product features, terms or even pricing with your supplier base, because you have power over their access to your market. This kind of power gives companies like Wal-Mart the ability to have much higher profitability than competitors, because selling to the largest customer can be the key element in maintaining dominant market share.
As you can see, there are many ways an acquired company can add real value to your bottom line beyond simple adding sales volume or cash flow. In our next article on this subject, we will more closely examine how to put a price tag on these gems of value, so that you will be more likely to make solid offers on the targets that make the most strategic sense.
Robert Bradford is President and CEO at the Center for Simplified Strategic Planning. He can be reached at