- You build whatever you can
- You buy only that which:
- You can’t build (e.g., certain patents, compelling brand names, scarce electromagnetic spectrum)
- You can’t build fast enough to meet your strategic needs (e.g., big chunks of customers, smaller competitors in a growing segment)
- You can get cheaper than building (bankruptcy!)
What this means for negotiating deals and valuing companies is that you always have to know whether the acquisition target is something you could (realistically) build. If you can build it in an acceptable time frame, you will likely have a value gap with the seller. Why? For the simple reason that it probably cost the seller about the same to build it, and people who build businesses usually do so to make money. The seller will want a cash flow multiple, or a certain return on what they’ve invested, or some other magic number. You’ll be focused on creating NPV compared with what it costs to build. Outcome – unless the seller is very motivated, you won’t have a deal.
To my point of quickly eliminating “loser” deals before you waste too much time on them – unless it’s on the discount rack, don’t get bogged down with stuff that your company can just as well build.