EXIT STRATEGIES: Threats and opportunities

Fundamental to the strategic value exit is the identification of those assets or processes that the seller has which can solve an urgent problem or open up a significant new revenue opportunity for a select group of potential acquirers.

To fully appreciate how a strategic exit is created, we need to have a good understanding of the nature of threats and opportunities and how we match these to assets and processes to create strategic value, as well as identify which assets and processes are appropriate for strategic value exits.

The nature of strategic value is that it directly impacts on the ability of a large corporation to achieve its strategic objectives. Thus any threat to its existing business needs to be countered with a solution. This is often acquired from outside the corporation if the price is less than the loss which would be incurred without the acquisition. Similarly, revenue objectives may be enhanced by introducing into the corporation an asset or capability acquired through an acquisition.

Large corporations don’t just make acquisitions to solve problems, we should be alert to the fact that most large corporations buy in their revenue generating innovations. Thus a small company which can offer an innovation which enables a large corporation to generate significant new revenue would be an attractive acquisition as long as the investment provided a healthy return.

Note that in both these situations the strategic value of the acquisition is related to the problem or opportunity being addressed by the acquirer not the conventional financial value of the business being acquired. This is the key to extracting a premium on sale.

Finding buyers with an urgent problem

One approach to finding the right strategic acquirer is to find a potential buyer who has a serious problem you can solve. This may seem simplistic but there are countless acquisitions which are made for exactly this reason. The task of the seller is to be proactive in seeking out corporations where the firm can take away a serious problem or threat. Those targeted potential acquirers which have a serious problem which can be resolved by the selling firm should offer a significant chance for the selling firm to achieve a premium on the sale of their business.

To better understand the circumstances which drive this type of acquisition, think of the ‘problem’ or threat as a potential or actual reduction in current or forecast revenue if no counter action were taken. Normal business life is littered with such threats stemming from price wars, introduction of new technology, new legislation, loss of a major distribution channel and so on. External threats occur when the corporation has no effective control over the event, however, it will impact on their ability to compete or execute if no counter action is taken.

The other from of threat is from internal situations which disrupt the business, reduce capability or create a negative change in its future plans.

The strategic value for the acquirer is created where the threat can be solved, mitigated or reduced through the acquisition of the vendor’s business. The ‘problem solving’ approach to achieving a strategic sale of a business is to identify situations in which the firm’s assets or capabilities can counter an existing or emerging threat for a corporation which has both the capacity and willingness to enter into an acquisition.

External Threats: (examples):

• Major customer defaults
• Major supplier defaults
• A major supplier is likely to be purchased by a competitor
• New competitors enter the market
• A competitor introduces a more advanced product
• Current competitor becomes more effective
• Change in legislation
• Disaster (natural or terrorist)
• Loss of major contract
• Loss of distribution channel
• Changing customer buying patterns

Internal Threats: (examples):

• Loss of key employee
• Lack of funding
• Major delays on product development
• Serious personal health or family issues of senior executives
• Urgent need to buy out investor or partner
• Need to liquidate to retire

Below are some detailed examples which demonstrate threat situations.

Pioneer Computer Systems acquired a supplier to gain control over a strategic component of their product development infrastructure.