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Discover the pros and cons you need to know before merging.
Buying a customer's company is not as common as buying a supplier, but the intent is similar: integrating two links in the supply chain to become more competitive, capture cost savings and grow profits. For example, a manufacturer might buy a distribution operation, or one that uses its parts, to produce an end product. Or a producer of sheet steel may buy a fabricating company, consolidating two intermediate stages in a supply chain.
In a landmark analysis, Michael Porter of the Harvard Business School identified some success factors and drawbacks of acquiring a customer. Here are several that a company should be aware of:
- Access to a new market. The purchase could provide a way to expand into a new geographic region, such as Europe or Asia. Alternatively, it might allow access to a different industry, like a manufacturer of consumer goods expanding into the institutional market.
- Greater access to a specific supply chain. Automotive and aerospace companies have well-defined supplier tiers. Acquiring a company in a higher tier could be more secure or offer other opportunities not available further out in the circle, like involvement in product development.
- Better access to market information. Sensing fluctuating demand sooner would make production planning more accurate. Advance knowledge of changes in end-product design, such as color trends or using advanced materials, would make for better process development.
- In an industry where other companies tend to be more integrated, acquiring a customer could balance the competitive position.
- When the buyer has technology or management methods that can upgrade the acquired company's performance, it can reduce overall costs and increase profits.
- The buyer will capture the margin the customer was earning on its sales.
- Increased control of production, operations, purchasing and information processes across the two companies is possible. You may also take advantage of your ability to use technology or management methods, such as lean manufacturing, to upgrade the company's performance.
- It's not always true that a strong position in one market is automatically extended to another. A company can underestimate barriers to entry into the new market or not fully understand the risks.
- Efficiency in the current business and industry may not translate to effectiveness in a completely different business type. A manufacturer of consumer goods with a strong brand, for example, might move into the retail sector, only to find that its branded stores do not capture enough customers from more diversified retailers.
- The buyer can underestimate the initial and ongoing capital investments required and find it exceeds its ability to raise funds.
- If growth projections are overoptimistic, revenue will fall short, and the buyer may be stuck with excess capacity and inventory. Risk that was spread out over two companies now belongs to only one of them.
- Culture clash may stand in the way of effective integration. Success requires good understanding of differences between the two cultures. Such differences could include attitudes of union versus non-union labor, or a top-down versus bottom-up style of management. Employees may be team-oriented in one company and competing with coworkers in the other. Blending them will take good communication and training.
Making a decision to acquire your customer is complex, and it demands careful research and planning. Getting outside advice is usually a good idea. A valuable source of information is a banker who has experience in mergers and acquisitions.
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