Three essential questions can help companies determine when buying rather than building makes sense for them:
- Does someone else have a capability that would enhance your business? There are many different kinds of capabilities-technologies, sales channels, operations in particular geographic areas and so forth. If no one else has the capabilities you need to strengthen or adapt your business, you obviously have to grow them yourself. If the capabilities are available, they may be candidates for acquisition.
- Is the risk-adjusted rate of return higher if you buy the capability than if you build it internally? Every acquisition carries risks, but every investment in organic growth also carries risks. The challenge for companiesÂ´ financial teams is to create apples-to-apples comparisons for expected returns on investments in organic vs. inorganic growth, factoring in the risks on both sides as accurately as possible.
- Do you have a “parenting advantage” in managing the capability? Capabilities donÂ´t exist in a vacuum; they exist in organizations. If your organization is better than anybody else at managing a particular capability-perhaps because of your experience with similar ones-you have a built-in advantage over other potential acquirers.
Source: The Renaissance in Mergers and Acquisitions: What to Do with All That Cash? by David Harding, Karen Harris, Richard Jackson and Satish Shankar | Bain & Company