Excess demand

excess-demandSometimes it is not what you can do for us, it is what we can do for you. One of the paths that you can take with an acquisitions strategy is to focus on what you have in abundance which you can supply to a new acquisition to make them more profitable, especially if this is something which you can’t use yourself or which has no marginal cost to you.

Thus, a company which has excess demand and does not have the capacity to service that demand might look to buy a firm which can readily take on new demand and contribute additional profits to the new owner.

Rapidly growing markets often throw up situations where demand outstrips supply. The usual market reaction is to increase prices until these are again in balance. However, a supplier might take a different approach and seek out an acquisition which can be readily converted to a new source of supply.

The target acquisition would need to have the capability and capacity to convert its facility so that it could produce the product or service in demand as well as have the capability and capacity to satisfy that demand.

What you should avoid is simply buying a lookalike business which is already supplying into the market. While you may pick up some economies of scale, these are somewhat unreliable. Instead, you should be focusing on areas within your own business which are placing constraints on your ability to increase your supply.

Select target firms which can provide capacity in those areas where you are constrained but are in a situation or market where the intervention can lift their profitability. The objective of undertaking the acquisition is to take advantage of a market shift where you can direct the excess demand to the new subsidiary and use that opportunity to increase their profitability.

Your own constraints can exist anywhere along your supply chain, so your acquisition targeting needs to focus on that part of your supply chain which can have the greatest impact on your ability to lift revenue and profit. For example, you may be constrained in manufacturing capacity, in which case even an overseas factory might be in your sights. If, on the other hand, you have excess manufacturing capacity but have limited distribution capability, you might look to buy a firm with extensive distribution capacity.

One aspect of this situation which you need to be sensitive to is that your own staff may already be stretched satisfying a buoyant market. If that is the case, you need to look for potential acquisitions which can operate without a lot of intervention. You need to find a firm with good management and internal governance systems but which also has a team of senior management who desire to stay with the firm post-sale or where there is a good succession plan to replace departing senior management.

Excess demand in an area where you have competitive advantage can give you an opportunity for growth. However, make sure you only take on something which you have both the capability and capacity to manage.

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