Financial Acquisitions deliver inherent revenue and profits
While there is an overwhelming focus on cost savings and synergies through integration in the merger and acquisition literature, there are considerable challenges in securing those benefits. Such a focus, however, overlooks much of the mainstream acquisition activity which is often simply about buying a business to run yourself, or buying a business as a corporate acquisition because it offers considerable upside through intervention activities within the business. This is where the concept of a financial acquisition rather than a strategic acquisition plays out.
A strategic acquisition is generally held to deliver value to the acquirer well beyond the profit projections which the acquisition as a stand alone entity can deliver. But for the moment, let us just consider the stand alone business and where value can be derived from that. What we need to do is to evaluate the future stream of net earnings that stem from the resources contained within the acquired entity. If no additional profits accrue to the parent company or owner outside of the entity itself, then there are no strategic benefits arising from the acquisition. That is not to say it can’t be very profitable, but this would be regarded as a financial acquisition.
A very stable and resilient business may provide a target rate of return even if not discounted. There are also acquisitions which left to pursue their current plans will return a very good return on investment (ROI), especially if the price at acquisition undervalues the future earnings or overstates future risk. For instance, some firms are sold at a discount in order to secure other benefits such as future employment for loyal staff or retaining family brands. On the other hand, the buyer may be seeking a business where there are opportunities for expansion or intervention which offer good prospects of higher net earnings or capital gains.
Look for future growth potential
The future prospects of a business may be enhanced simply by bringing new energy, skill, knowledge, contacts or orders to the business. Higher levels of intervention my include replacing existing management, implementing new systems and processes, reorganizing the business, closing down or stripping out underperforming activities, refocusing the business on its core capabilities and so on. A corporate acquirer may bring to the business new IP in the form of brands, copyrights, patents and trademarks which improve the productivity or attractiveness of the business. Similarly, a corporation my channel excess demand to a newly acquired entity.
Acquisitions which are not integrated can most often present very attractive ROI while avoiding the inherent risks of full or partial mergers. When you are considering an acquisition remember to separate out what the business is currently capable of achieving with what it could achieve with planned intervention. If you can provide the means of leveraging higher levels of productivity, greater resilience or increased growth, stand alone acquisitions can be of relatively low risk but still return high ROI. The key here is to be able to assess your own contribution and to seek out businesses where those interventions have the highest impact.
