Asset Acquisition Strategy

An asset acquisition strategy is a means for a company to promote growth by purchasing other companies or business units of companies. This is in contrast with an organic growth strategy, whereby the focus is increasing the activity of in-house business lines. Companies in certain sectors often deploy asset acquisition strategies. There are also dedicated roll-up business models that exclusively stick to this strategy for growth.

An asset acquisition strategy provides a way for a large company in a mature sector to advance incremental sales or profit growth, or for a smaller firm to accelerate steps toward a size target. There are many elements of a strategy that a company considers. First, it decides whether an asset acquisition is for purposes of building economies of scale in an existing product or service line, moving into an adjacent market, penetrating another geographic market or even pre-empting a competitor that may be eyeing the same asset. Most often the objective is to benefit from synergies that accrue on the revenue side and more so on the cost side (e.g., reducing overlapping costs) when an asset is acquired and integrated into the company's operations.

Other usual motivations are to purchase a product line or service that can be folded into the existing line-up of offerings to expand a customer base, or gain access to a new geographic market. Another crucial element of an asset acquisition strategy is the purchase price and financing method. Prudent managers will not overpay for an asset (i.e., it will avoid making a dilutive acquisition), and when they do decide to buy another company or a unit of a company they will make sure that the impact to the company's balance sheet is acceptable. For instance, if too much debt must be incurred to acquire an asset, the company would think twice. Another element of the strategy is determining how the acquired asset will be integrated and then tracked in terms of contribution to profits. Management will consider the steps needed to close and whether there is a long-term cultural fit (to retain key personnel). It is important that a sound method is in place to monitor the acquired asset's contribution to the existing company's cash flow or earnings per share (EPS) or other financial target so that management can build a template for future asset acquisitions.

A roll-up business model relies on an asset acquisition strategy for growth. VCA Antech, a nationwide chain of veterinary clinics and diagnostic laboratories, was founded in 1986 as Veterinary Centers of America. Two years later it acquired Antech Diagnostics. Since then the company slowly and methodically bought hundreds of individual veterinary clinics in the fragmented sector. Economies of scale increased steadily over time, particularly on the cost side, as the growing entity enhanced its price negotiation power with suppliers to animal clinics. In 2017, Mars Inc. executed its own asset acquisition strategy by buying VCA Antech. Not all asset acquisition strategies work out for companies employing them to grow due to poor design or execution, but VCA Antech's strategy paid off well for its shareholders.