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as possible strategic tool

Think of purchase or sale
as possible strategic tool

A number of corporations and private investment groups are constantly looking for strategic acquisitions to meet a variety of corporate objectives. These objectives can include: increased sales revenues, improved profitability, additional market share, new products and technological advancement. A recent acquisition in the Western New York area involved the purchase of a distributor with approximately $4 million in sales by a like company with approximately $70 million in sales headquartered in New England.
The local company had grown from inception, some 75 years ago, to become a dominant player in the Western New York marketplace. Through expansion it had established sales offices in major cities and was active in contiguous states. When the owner looked to retire, he enlisted the services of an intermediary, and found the most aggressive buyer to be the New England-based company.
The deal was successful because it met each party’s objectives. The seller sold to an established company that minimized the requirement for a post-sale transition period. The buyer made a strategic acquisition and was able to increase sales and market coverage and gain economies of scale by relocating various administrative and inventory functions to its headquarters in New England.
With today’s ever-quickening business pace, it is important to review all your options and consider a long-range business strategy. Your industry association may be able to help you assess where your industry is headed, where new and emerging competitors will come from, and what challenges you may face due to anticipated technological changes.
With industry information in hand you need to carefully assess your business as it compares to various known and potential competitors in your industry. Are you large enough to command the required purchasing power? Do you have the access to capital necessary to meet future capital equipment requirements? Do you have the sales force and access to the distribution channels that will allow you to compete effectively in the future?
After considering these factors, you can ask yourself if a strategic acquisition or merger is the preferred method to meet your objectives.
Listed below are a variety of the selected parameters and considerations associated with a strategic acquisition, along with examples of area companies that have faced similar situations in the past. Keep in mind that most decisions will deal with more than one scenario.
Economies of scale. An area service company is considering a merger with a similar firm to take advantage of the cost savings generated by combining various sales and administrative functions. The goal, for each owner, is a larger, more profitable company.
Manufacturing expertise. An area manufacturer acquires a company that has expertise in a related manufacturing process. It was able to gain the expertise required to meet its customers’ requirements and expand by way of a horizontal integration.
Distribution channels. A young, growing company with a patented product decides to sell to a multinational and take advantage of the pre-existing distribution channels. The deal includes an employment agreement and a royalty arrangement for the seller. The seller gains immediate access to distribution channels and marketing resources that would have taken considerable time and financial resources to achieve otherwise.
New products. The multinational company highlighted in the prior example acquired a new niche product to fill out an established product line and was able to profit by dramatically “shortening time to market.”
New customers. A European-based manufacturing company, looking to meet a customer’s global sourcing requirement, is seeking a related company in the North American market with existing vendor relationships and target customers. Most of today’s large corporations have vendor lists by commodity. A strategic acquisition may be the most advantageous way to overcome the customer’s response of “our vendor base is full.”
New service. Rather than start from scratch, a local service company is seeking an acquisition in a related industry to broaden the services it provides. Its goal is to increase sales to existing customers by providing a new service. By acquiring a proven service provider it will avoid start-up mistakes and may be able to cross-sell to an expanded client base.
Increased purchasing power. An area distributor purchased the assets of a struggling distributor with like products to increase its market share and purchasing power in a very volume-sensitive distribution business.
Gaining critical mass. A software company was better able to complete the development of an expanded version of its software by selling to a large public company. The seller lacked the capital to effectively complete the project and the buyer was able to use its resources to finish development of an exciting new product. The seller benefits from a potential royalty stream and the buyer has a new product to sell through its established distribution channels.
Financial strength. The owner of a capital-intensive business does not want to continue to be “on the line” with his lending institutions when purchasing the latest capital equipment. After reviewing industry information he notices signs of increased consolidation activity. He talks with his professionals and contracts with an intermediary to sell his business to a larger player.
Time itself has become a critical factor in today’s business environment. United Parcel Service of America Inc., in its recent advertisements, proclaims that it “moves at the speed of business.” With businesses’ ever-quickening pace, it is more important than ever to establish your company’s long-range plan and determine if you have the resources to competitively compete in the future.
Once you have assessed your situation, you can determine whether a strategic acquisition or merger will help you succeed. You may be well-advised to play the role of the “big fish” and leverage your resources and grow through acquisition, or play “little fish” and make efforts to maximize the value of your firm and sell outright.
(Eric J. Vangellow is president of Vangellow & Co., a Pittsford-based mergers and acquisitions and consulting firm.)

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