Not all acquisition targets make sense from a strategic standpoint. When you acquire another company, it affects how you compete in the marketplace, how you work with customers, and how your competitors will react.
- Not all acquisitions make sense from a strategic standpoint. When you acquire another company, it affects how you compete in the marketplace, how you'll work with your customers and suppliers, and how your competitors are going to react. When you go to assess strategic fit, I always encourage people to use a framework called Porter's Five Forces. Dr. Michael Porter looked at competitive dynamics and he laid out the five major forces that affect how companies compete.
The first one to look at is competitive rivalry. This is looking at the existing players in the market and how they react to one another, how they compete with each other. Next is the threat of new entrants. This looks at what is the likelihood that a new competitor is going to enter your marketplace and compete with you. The third force is the threat of substitution. What's the likelihood that a new product or service is going to completely displace the products or services already offered in the market? An example of this is traditional film for cameras.
When digital came along, that traditional film became completely irrelevant and was substituted by a new product. The last two forces are buyer power and supplier power. For buyer power, this looks at the people you're selling to and where the power lies in that relationship. If your buyers are big and you're small, your buyer has the power. However, if you're large and selling to smaller companies, or if you have a very differentiated offering where nobody else offers it, you've got the power in that relationship.
Supplier power looks at the opposite side of that coin. It says, for the companies you're buying stuff from, who has the power in that relationship? If you're large and your suppliers are small, you have the power. Taking a look at all of these forces and understanding how any acquisition is going to affect them is a critical element of your strategic planning and acquisition process. Make sure you're rigorous about assessing, if we buy this company or buy this asset, how is it going to affect each of these forces? If there's going to be negative effects, you need to understand that before you move forward with a transaction.
Strategic fit and rationale are critical evaluation criteria of any good M&A process.
- Describe the forces in the Porter's Five Forces framework
- Identify the elements that go into making an acquisition case
- Contrast the benefits and costs of approaching a target directly or indirectly
- Explain why the Herfindahl-Hirschman index is important
- Explain how to conduct good valuation analysis
- Identify four methods of paying for an acquisition
- Discuss the reasons for including additional deal terms beyond price
- Describe the due diligence process and explain why it's important
- State the reasons why communication during integration is critical