The specialists interviewed for this report, emphasize one benefit of the non-financial measures at a point were they works as indicators within a specific business and have relevance to internal benchmarking (Interview, 2006). They emphasize the importance to be specific of how the data is used though. Instead of talking about non-financial measures the specialists rather emphasize the synergies that non-financial data originates from.
Synergies or beneficial resources can be compared to corporate synergies which origins from a scientific term, and “refers to the phenomenon in which two or more discrete influences or agents acting together create an effect greater than that predicted by knowing only the separate effects of the individual agents” (Wikipedia, 2006). In business and the corporate industries synergies focuses on adding value to the organization and maximizing return on investment. The corporate synergies occur, according to the definitions of Wikipedia (2006), when corporations interact congruently. A corporate synergy refers to the financial benefit a company enjoys when it merge or acquires another company. According to Wikipedia’s (2006) definition of corporate synergy there are two distinct types of corporate synergies:
• Revenue: a revenue synergy refers to the opportunity of a combined corporate entity to generate more revenue than its two predecessor standalone companies would be able to generate. For example, if a company A sells product X though its sales force, company B sells product Y, and company A decides to buy company B then the new company could use each sales person to sell products X and Y thereby increasing the revenue that each sales person generates for the company.
• Cost: a cost synergy refers to the opportunity of a combined corporate entity to reduce or eliminate expenses associated with running a business. Cost synergies are realized by eliminating positions that are viewed as duplicate within the merged entity. Examples include the head quarter’s office of one of the
predecessor companies, certain executives, the human resources department, or other employees of the predecessor companies. This is related to the economic concept of Economies of Scale.
The beneficial resources do not entirely count to the concept of synergies, although both concepts have similarities.
10.1. Synergies associated with an exit
Referring to the interview held with two valuation specialists (Interview, 2006), the view of valuing benefits than raw non-financial information, I will clarify the concept of synergies or corporate beneficial resources that are interesting for MindValue’s prospected buyers.
In MindValue’s case the most interesting exit strategy would to be acquired by a larger corporation. Referring to the theory of exit strategies in this report, acquisition is by most the usual way to exit for a start-up company. The other exit strategies are not applicable enough for start-up firms, in order to be successful, since start-ups normally do not have the historical track record of annual profits and the possibility to heavily invest money, which normally is required.
In the design of a strategy that pinpoints possible targets for future acquisition, already in a start-up phase, it is important to highlight the beneficial resources that are likely to be taken into future consideration. The resources identified to future deliberation are: Distribution Channels, Strategic Alliances, New Technology, and New Competence. This selection is based on MindValue’s most powerful advantages and from literature, describing synergies (MindValue, Company data, 2006; Kotler et al, 2003; Sevenius, 2003).
The resources are valued differently depending on how valuable each synergy is to the firm of interest – the acquisition firm. If the start-up firm succeeds in attracting many customers to an e-tailor website, then the valuable synergy for an acquisition firm might be the reach to the same audience, in order to increase the offerings and increase the product park. This, in comparison to how much effort the same acquisition firm has to make, in order to attract the same amount of customers to its market. If the start-up firm manage to attract a lot of viewers, who passes through the web-site, but are no actual customers, the value of the viewers might not be the same, since no transactions are clearly present. Same philosophy is present when analyzing Strategic Alliances, New Technology, and New Competence – How much effort must the acquiring firm make in order to mach the same amount of utility?
The concept of valuing synergies is closed connected to Porter’s (1980) Five Force Model.
The Five Force Model is often used to assess industry structure and attractiveness. The model is a helpful tool when deciding whether to enter a new market or industry.
The synergies might also be valuable advantages that are impossible to acquire in other ways, like first mover advantage. The start-up firm might have produced a unique product or service that is closed connected to the firm. Some products and services might be very hard to imitate,
since they belong a unique property. This is the case of many Internet start-ups, acquired by other firms. Communities are almost impossible to copy, since many of them are created of a special group of interests (DI, 2007). To attract the same group of interest will require a huge amount of resources. The opportunity of buying the whole firm of the services, or products of origin is many times a less resource bound operation.
10.2. Distribution and Marketing Channels
Distribution is one of four aspects of marketing. The other three in the marketing mix18 are product management, promotion, and pricing (Kotler, 1991).
Before a product reaches the final customer or end-user, there will be a chain of intermediates, each passing the product down the chain to the next organization. This process is called distribution channels or distribution chain (Kotler, 1991). Distribution channels are used to display, sell or deliver physical products or services to the end-user or customer. The channel includes distributors, wholesalers, retailers, and agents (Kotler et al, 2003).
To reach a target market, a company can use three kinds of marketing channels, were distribution channels is one of them. The other two marketing channels are Communication channels that deliver and receive messages from target buyers, and include newspapers, magazines, radio, television, mail, telephone, billboards, posters, fliers, CDs, audiotapes, and the Internet. The third marketing channel is service channels which are used to carry out transactions with potential buyers. Service channels include banks, transportation companies, warehouses, and insurance companies that facilitate transactions (Kotler, 2003).
10.2.1. Relevance to MindValue
Due to MindValue’s structural nature, distribution and marketing channels plays a significant role in a future exit for MindValue. On par with its business plan, MindValue is seeking to play an intermediate role on Internet together with portal activities. Distribution and
marketing channels are synergies that are relative easy for MindValue to develop. On par with the specialists (Interviews, 2006), channels are synergies that have value-relevance
concerning a future exit. In an early stage though, the issue of forecasting the value is still unanswered. According to the specialists (interview, 2006), they are not positive of valuing synergies in early phases, more than admitting that parameters taking into concern are not
18 The marketing mix is the set of marketing tools the firm uses to pursue its marketing objectives in the target market (Kotler, 2003)
non-financial information, described in chapter 11, but the future outlook of synergies.
Potential firm’s willing to acquire MindValue might look at successful distribution and marketing channels as important value-drivers.
10.3. Strategic Alliances
In order to achieve leadership, companies are discovering that they need strategic partners in order to be effective. Both small and large firms often cannot achieve leadership without forming alliances with domestic or multinational companies that are complement or leverage their capabilities and resources. Entering a new market or new country often requires local partners or suppliers. Joint ventures with local firms or buying from local suppliers are common ways to meet “domestic content” requirements (Kotler, 2003).
Kotler (2003) states that many strategic alliances take the form of marketing alliances, and these fall into four major categories:
1. Product or service alliances. One company licenses another to produce its products, or two companies jointly market their complementary products or a new product.
2. Promotional alliances. One company agrees to carry a promotion for another company’s products or service.
3. Logistics alliances. One company offers logistical services for another company’s products.
4. Pricing collaborations. One or more companies join in a special pricing collaboration.
To form successful alliances and collaborations companies need to pursue creative thoughts to finding partners that might complete their strengths and offset their weaknesses.
10.3.1. Relevance to MindValue
MindValue started from a joint venture with a software provider already in an early phase in order to strengthen its technical platform, a joint venture that finally ended with an acquisition by MindValue. The synergy of strategic alliances has already been displayed in the case of MindValue, but is most likely to develop further. On par with its business model a key
success factor for MindValue is to develop several partnership with strategic partners in order to strengthen its own business model.
Potential firm’s willing to acquire MindValue might look at successful its strategic alliances
as important value-drivers.
10.4. New technology
Acquiring new technologies is a key element in the strategic development of many companies.
New technology enables organizations to achieve strategic objectives both within their
institutions, as well as in their external environments, such as enhanced community image and competitive positioning. In technologically fast-moving environments, established and
matured firms often use acquisitions as means of acquiring specific technical capabilities (Grant, 2005). Microsoft is an example of a company that has benefited substantial
technology from such acquisitions. Microsoft’s adaptation to the Internet era was based on acquired technology capabilities through acquisitions (Grant, 2005). The risk associated of the new technology acquisition, a firm faces is the way of successfully integrating the acquiree’s capabilities with its own.
10.4.1. Relevance to MindValue
The technology MindValue currently is using is not unique enough to make it competitive as a valuable synergy. Others can imitate the technical platform the solution is based upon, without any acquisition, and it is therefore difficult for MindValue to benefit from synergies of new technology. The synergies of new technology have therefore no value relevance in MindValue’s start-up phase, and the focus of value drivers should be other synergies.
10.5. New competence
Acquired new competence is very close related to new technology in high technology firms.
The new economy is also reckoned as the knowledge economy (Kotler et al, 2003). The growth of the new economy is based on service related industries, and the entire amount of the growth came from high technology industries. This means that right knowledge and high technology skills have become really competitive advantages. A company like Microsoft is dependent on its intellectual brainpower in order to compete with other competitors on its state of the art software development.
10.5.1. Relevance to MindValue
The competence MindValue possess might be a competitive advantage and a synergy with significant value relevance. The longer the team of MindValue is progressing the more value in competence, the firm got. Dividing the firm’s competence in two disciplines, one can indicate the technical skills as one part and the entrepreneurial and management skills of a start-up company into another part. Both disciplines individually might not have significant
value, competitive enough to be a single reason for an acquisition. But both together, after a time of progress and success, they might be a key competitive advantage for the specific operations of the firm, and is a prerequisite for the operations to maintain success. This is often the case after acquisitions of new technology, since the crew that made the start-up company valuable in many cases is best suited to run the operations until a others have been educated enough (FT, 2006). In many cases is it a prerequisite of keeping the key persons of the origin staff a period of time, to guarantee the acquired firm’s constant success until others have learned the key competence.
New competence might be a specific reason, attractive enough for an acquisition, especially in the new technology industry, where the state of the art competence is hard currency in the competitive environment of the Internet industry.