Any meaningful discussion of M&As should start with an understanding of the role of strategic planning in the corporate decision-making process. Most companies reinforce or update their business development strategy annually. Typically, the end product of this planning process is the articulation of a limited number of strategic objectives whose implementation begins with translating them into concrete investment activities.
The categories of the investment options available are limited. They take the form of internal development (build), acquisition (buy), or strategic partnership (ally). It should also be understood that, even in those cases in which a formal, structured strategic planning process is not employed, a company will still be guided by a stated or implied business strategy that is broadly understood within the organization.
That strategy may result in a planning document, or it may simply be a shared understanding within a business of the need and intent to fill important gaps in the company’s portfolio and infrastructure. An expansive description of the strategic planning process is beyond the scope of this discussion. Suffice it to say that companies typically chart a strategic direction that is expressed in the form of long-term objectives and that the realization of those objectives must be driven by specific investment activities. These objectives typically fall into these broad categories:
- Developing or acquiring new products for current markets
- Expanding the distribution channels for existing products
- Developing or acquiring new products for new markets
- Achieving economies of scale in order to lower production costs
- Increasing brand recognition of products and/or services
- Developing or acquiring new technology, intellectual property, or research and development (R&D) capability
- Establishing control over sources of supply by expanding operations toward suppliers’ markets (backward integration)
- Expanding operations toward customers’ markets (forward integration)
Frequently, the approach employed to accomplish strategic objectives is purely acquisition based, but, as noted, acquisitions are just one of the three broad investment options (build, buy, or ally) available to further these objectives.
These options are significantly different from one another in terms of risks, benefits, advantages, and disadvantages. The differences revolve around the trade-offs among a number of variables, particularly those of strategic fit, speed of implementation, cost of implementation, and anticipated synergistic benefits. Let’s talk about them in rather details:
- Strategic Fit. It is axiomatic that the investment option must support the entity’s strategic objective. Internal development generally provides the greatest potential for control and customization, and often the greatest assurance of strategic fit. Acquisitions and strategic alliances, when they can be implemented, generally will provide an approximate fit. However, occasionally the assets needed to accomplish a key strategic objective are unique, that is, truly one of a kind. If such an asset does not exist in the marketplace (e.g., customized infrastructure technology), then acquisition can be automatically ruled out as an option. Alternatively, the unique assets coveted (e.g., intellectual property assets) may be owned by another entity, and acquisition of that entity or strategic partnership with it may be the only options available.
- Speed of Implementation. One of the primary factors an enterprise must consider when making an investment decision is the importance of speed in accomplishing the strategic objective at hand. If speed is a primary consideration, acquisition is likely to be the most attractive alternative, assuming some or all of the assets acquired are a good strategic fit. This is particularly the case when market entry or market expansion is the objective. Internal development may provide a more precise fit, but the market opportunity may have passed by the time an internally developed initiative is implemented. Strategic alliances may also be a viable option, but execution can be difficult and time-consuming and, by definition, requires a sharing of the benefits derived.
- Cost of Implementation. Cost is clearly a key consideration. Strategic alliances can be attractive because their costs (as well as their benefits) are shared. Acquisition, however, is generally the most expensive option, because it will often entail paying a premium over the cost of internal development.
- Synergistic Benefits. When acquisition or strategic alliance is the option exercised, there is generally a presumption that, by combining assets and/or capabilities, benefits can be realized that are greater than what would be expected if the two companies operated independently. In the case of an acquisition, these anticipated synergies must be considered in the context of any purchase premium paid by the acquiring company. The investment option chosen will involve the weighing of these, and perhaps other, variables specific to the facts and circumstances of a given situation. Frequently, acquisition is the favored option, because it best satisfies the company’s objectives in the context of these decision variables—or at least appears to do so.
Impact Of Globalization
The recent, accelerated pace of globalization has had a significant impact on strategic thinking and strategic plan implementation in the corporate world. Driven primarily by technological innovation, competition has intensified in many industries.
To a greater extent than ever, this has led to strategic initiatives that focus on more aggressive market expansion and on rapidly attaining economies of scale and substantially enhanced efficiencies. This in turn has placed increased emphasis on the rapid implementation of strategic initiatives.
Arguably, the interplay of the factors just noted has given primacy to speed of implementation and provided significant impetus to acquisition as an investment option in many cases. In situations where acquisitions are the chosen path to achieving strategic objectives, this choice is generally accompanied by increased risk. That risk derives from the likelihood of imperfect strategic fit, the high probability of paying a premium for the assets acquired, and the exposure inherent in integrating the purchased properties into the fabric of a separate business. For these reasons, a thoughtful, well-planned, and disciplined approach to acquisitions is critical, if these risks are to be mitigated.
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