This is a common challenge for most firms looking to build or buy core technologies vital to growing their companies. If you look at most of the Fortune 500 there are daily announcements on the latest acquisition and how it will either sustain their position in established markets or provide the springboard into non-traditional areas. Whether acquisitions are right for your company depends on several factors but some of the main considerations are highlighted herein:
- Build versus buy: is your firm experienced enough to get into a market as the barriers to entry are low? If that barrier is low enough chances are building it with some outside help may be more advantageous as low barriers suggest an established market with limited innovation potential. However, if there are high barriers to entry perhaps an acquisition makes sense.
- The ‘flexibility factor’: Many large companies choose to buy firms as their flexibility is hamstrung by quarterly reporting and excessive overhead to sustain current business operations. If you are a private company with a solid business plan and access to enough customers who provide you with the domain expertise to innovate, you may have the opportunity to go it alone and perhaps get acquired yourself. If you are an established company with growing revenue in established markets and there is a need to import non-traditional approaches to access new markets then an acquisition makes sense. Flexibility is not only determined by the weight of your overhead, but decision making culture, the level of conservatism in the markets you are going after and most importantly, flexibility of capital which will fund the potential acquisition.
- The Joint Venture: This may be good for your firm if you do not have the capital but find a willing party to buy into your business plan and share the risk in accessing new markets. The obvious pros are not having to carry all the risk, trying out the partner for a potential future acquisition, access to expertise and patents which your partner may already have. The cons are you may be educating future competition should the relationship terminate and if the firm is a potential acquisition the success of the JV will add revenue to their operations hence increasing the valuation.
- Acquiring IP: This is a risky one. The best patents are those that have already been successfully defended. If you have experts who can assess the value that is only half the battle, you still need to acquire, productize market and sell the result of that IP which occupies much time and capital.
These are just a few of the myriad of factors one must consider before considering an acquisition. The best advice comes from those who have done it (successfully) before and surrounding yourself with some outside help to address all the pros and cons just makes good business sense and in most cases gives you a moment for pause to really think about if it is right for you.