The Importance of Value Drivers When Assessing Targets

Having established the importance of corporate strategy as the starting point for any deal and introduced possible acquisition types, let’s shift attention from the Strategy stage of our framework to Search and Assessment (Figure 1). What value does a potential target bring, and where do we find good quality targets? Let’s start with value


Figure 1. Stillwater Capital Acquisition Framework

Sources of Value

There are many ways in which a target company can bring value to an acquirer. The four most salient are:

• Resources – includes the employees, management, customers, technologies, products, and facilities used to deliver benefits to customers and shareholders

• Processes – integrated activities (e.g., R&D, Manufacturing, Sales, Distribution) that allow a company to deliver these benefits faster, better, more efficiently than its competitors

• Profit Model – the revenue model and cost structure that together generate profits and cash

• Customer Value Proposition – the central offering that helps customers do an important job better, faster, easier, cheaper

Clayton Christensen et al explain:

“Under the right circumstances, one of those elements – resources – can be extracted from an acquired company and plugged into the parent’s business model. ….. A company can’t, however, routinely plug other elements of an acquisition’s business model into its own, or vice versa. Profit formulas and processes don’t exist apart from the organization, and they rarely survive its dissolution. But a company can buy another firm’s business model, operate it separately, and use it as a platform for transformative growth.”

Which sources of value are most important? It depends on the purpose of the acquisition.

In the last article we categorized different types of acquisition by whether they were aimed at extending or transforming your business. This distinction applies here as well. To extend the business, you are primarily targeting resources that will strengthen the firm by expanding reach, filling capability or product gaps, increasing market penetration, and enforcing dominance in selected markets. But you cannot transform your business through additional resources. To transform you must buy a different business model, including the customer value proposition, profit model and processes.

The key question is, “do you want to radically change your business, or not?” Figure 2 summarizes the implications for the kinds of acquisition you might undertake and how you will prioritize the drivers of value.

Figure 2. Connecting Purpose and Value


Further Implications of Extend vs. Transform

Frequent acquirer Pitney Bowes makes a similar differentiation, referring to “bolt-on” and “platform” acquisitions. The company’s former Chief Financial Officer Bruce Nolop says:

“One type, the bolt-on, fits neatly into a business or market we are already in; the other, the platform, takes our company into a new (though adjacent) business space or activity. If a bolt-on acquisition is the equivalent of a swan dive, a platform is a reverse two-and-a-half somersault with a half twist. The higher degree of difficulty entails more risk (but a potentially higher reward) and less frequency; platforms represent less than a sixth of our transactions (although about two-thirds of our total investment) to date.”

Nolop goes on to explain the different criteria applied to the two categories of deals:

“When the acquisition under consideration is a platform, near-term revenue opportunities and cost savings fade in importance. Instead, strategic questions become paramount: Is this a business we want to be in? Is it sufficiently adjacent to our current offerings that we understand the market? Do we have “brand permission” from our customers to offer the new products or services? Does the new space promise faster growth than our legacy businesses do? Is the target company culturally compatible with Pitney Bowes? ….. With a bolt-on acquisition, such considerations are bypassed because the strategic question “Do we want to be in this business?” has already been answered. Instead, our focus is on probable business synergies and how they will show up in revenues and expenses. We target companies that can help us cross-sell products and services. We look for opportunities to combine facilities or staff with our existing businesses. We seek complementary technology or intellectual property that can help us gain a competitive advantage and that would be more expensive to develop on our own. And, particularly with acquisitions of independent dealers or distributors, we seek opportunities to strengthen our presence in attractive markets.”

In the next article, we will explore four key questions to assessing potential targets.


For more information, contact:

Doug Nix, CPA, CA



T/ 905-845-4340 x.211