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Choosing your Niche – Series M&A Strategy 7

Niche is the Key for Small Businesses

Until 2008, in the Japanese M&A market, many companies bought various businesses without careful consideration just because they were “cash cows”, but since the financial meltdown, many of those businesses that were bought were either sold or closed in order to focus their resources on their main business. In case of M&A for SMEs, the resources are limited, therefore you want to get the most out of the deal in order to maintain your company’s competency. So what should SMEs consider upon creating your M&A strategy? We’ll show you some general tips to consider according to your corporate strategy and market condition.

Creating Synergy through M&A

Being able to share resources and knowledge between businesses are one big thing to consider when you plan your M&A strategy. It turns the 1 + 1 = 2 formula into 1 + 1 = 3+.

Through what we have seen, acquiring businesses from completely different industry often doesn’t create that synergy effect since the knowledges to share are limited and there isn’t much similarity in the resources required to run the business.

On the other hand, if the knowledge can be shared and there’s similarities in the required resources, you’re probably on the good path. A good  example is a case we’ve supported in the past where  an electronic material manufacturer acquired a pigments manufacturer in which both companies had their position in a niche market. After the acquisition, the sales of the pigment company has doubled by sharing their knowledge in doing business in a niche market.

Business Portfolio

If your current business or market is coming to an end of the lifecycle, you may want to consider expaanding/modifying your business portfolio ,and M&A can be an excellent tool to make that happen. In such cases, you don’t necessarily have to think about the synergy between your current business and the business you are about to acquire.

Whether it is few years or few decades, every business has its lifecycle and will eventually come to an end but you want to avoid your portfolio from hitting the bottom.

For example, if you are doing some kind of business only in the car industry in a limited area, your company has a risk of going bankrupt if the car industry goes down, but you can mitigate/minimise the risk by expanding your portfolio to another industry i.e. medical, retail etc.

Adding a different business to your portfolio that has nothing related to any of the businesses in your portfolio is an option to consider because the further the businesses, not only the lifecycle of the business is different but you also have a better chance that the market condition of your current business doesn’t have much effect on the other.

One of our client (machine distributor) acquired a casual apparel manufacturer and added it to their portfolio. Since then, they acquired other apparel manufacturers and successfully positioned themselves in the fashion industry. A good example of one company going into a completely different industry using M&A as an option.

Geographic Area

Since the domestic demands in Japan has been encoutering a long hault, SMEs are becoming more and more active on expanding their business geographically. In the early stages, many Japanese SMEs expanded their business geographically to create advantage through cheaper labor but recent trend has shifted to doing business locally, in aim for the growth in local market rather than a base for manufacturing.

Statistics show that the anount of investments being made to ASEAN countries such as Indonesia, Myanmar, Cambodia, and Vietnam are rapidly increasing and local demands are growing as investments come in. There are many opportunities in those markets and acquiring or investing in a local company can ease your expansion.

In either case of the above, choosing the right niche is the key for a successful M&A.

In this series, we’ll explain why M&A can not only save many SMEs in danger but can also be a handy tool to strengthen your business quickly and efficiently.

To learn more about M&A for SMEs in Japan, don’t forget to checkout this book. (only available in Japanese)

『200万円でもできるM&A~百年企業を育てる最強のM&A活用術』(スモールサン出版)