Buyer’s Acquisition Strategies: What Buyers Want and How They Pursue it

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It is well understood that knowing your customers is the key to a successful product or service. Selling a business is no different. In fact, the first step in maximizing value is understanding what the buyer wants and needs, and how your company fits into the value chain of the buyer’s operations. But how do you get inside the buyer’s head? It’s helpful to remember that most of the time, long before a buyer approaches a potential target, there is a goal and a strategy about how to achieve that goal. While it may be next to impossible to get a buyer to fully disclose its ultimate objectives, an understanding of the focal strategies used in M&A can provide precious guidance. Used by corporations so well as by private equity firms, these strategies can be summarized as follows:

-         Horizontal integration;

-         Vertical integration;

-         Conglomerate integration (also called diagonal integration).

Historically, these strategies, often applied in their pure form, have contributed to the formation of major corporations and reshaped entire sectors of the U.S. economy. Today, these fundamental strategies are more likely implemented in various combinations both by strategic acquirers or financial sponsors and result in the acquisition of big and small organizations alike. A good understanding of their underpinning can prove instrumental in interpreting the economic inventive and value drivers sought by the buyer.

Horizontal Integration

A horizontal integration strategy seeks to combine businesses that operate in the same sector, in the same type of business or in the same stage of production. Some of the big name companies that successfully used horizontal integration in the past are Kodak, Standard Oil and DuPont. This type of integration helps organizations gain a larger share of the market and also eliminates competitors. However, the real advantage often lies in the ability to control prices and have access to new geographic markets. Other benefits include economies of scale and economies of scope. Economies of scale decrease the average cost per unit due to a larger scale of production of a single product so that the fixed costs can now be spread out to a larger number of units. For economies of scope, the average unit cost is lowered by sharing certain resources in the production, marketing or distribution of similar or complementary products. For instance, it is possible to sell different products by using the same sales force through the same distribution channels. The same know-how and technology used, for example, to produce PC monitors can also be used to make televisions. A good example of a company that more recently used this strategy to gain market share and build critical mass is Protection One, Inc. a leading home security companies in the U.S.  During the 1990’s, Protection One, grew rapidly through bolt-on acquisitions of small privately held companies and even the purchase of customer accounts.[1]

[1] In the M&A lingo, bolt-on acquisitions are companies, products, assets or customer accounts that fit naturally within the buyer's existing business lines.