Expanding your Technology Portfolio – Buy or Build?

By Michael Xie, Founder, President and CTO, Fortinet – Technology innovators doing things right would have seen their companies grow.

Beyond a certain point, they will want to own more technology to expand their business. What’s the best way forward then? Build their own with their proven teams, or acquire the best solutions from outside?

Both options have their merits and should be considered.

If you buy, for instance, you can rapidly add a new technology to your portfolio. If the acquired company has good R&D staff and other valuable assets, you can gain access to them at the same speed.

The downside, however, is that you will need to assimilate employees from two possibly very different cultures. This has proven to be an insurmountable barrier for many firms. Process integration of the two organisations can also be tough, while channel and sales strategies often conflict.

If you build, the advantage is that you will have better control over the development process and the technology’s eventual integration into your broader portfolio. New technology development also gives the opportunity to promote competent research leaders from within, with direct positive impact on career progression and staff retention.

The drawbacks are that sometimes existing employees don’t have the right knowledge to develop the new technologies needed. They may also be too absorbed in their current research areas to be well informed about the latest developments in new technological areas. Lastly, there is a chance that time and resources dedicated to new technologies will compete with the company’s core products, slowing down the developmental process.

All the pros and cons considered, the truth is that companies probably have to do both buying and building. Whichever route they choose, however, there are some actions they can take to improve their success rates.

THE BUY ROUTE

1. Do your due diligence
As with any commercial or personal investment, doing due diligence should be at the top of your checklist. It is, however, one of the toughest tasks in the entire acquisition exercise. Smaller companies, in particular, tend to have less audited financials. The usual approach of interviewing the firm’s top management is far less revealing of the true situation than interviewing every employee, which is often next to impossible.

In cases of doubt, it may pay to exercise caution. The question every acquiring company must ask − would your firm be better off missing a not-too-sure opportunity, than to rush in and acquire something that turns out wrong?

Self-conviction is important – give some weight to your own judgement and preferences. In terms of products, I personally would insist on being a happy user of a company’s products before talking about acquisition.

Take a step back and assess the long term impact of the acquisition: 5 or 10 years from now, how do you see the acquired technology/team fitting into your firm’s vision? Will they really be a significant revenue contributor?

Lastly, ponder over the worst-case scenario − if you make the acquisition and it doesn’t work out at all, can your company survive?

2. Don’t overpay
Prices of public listed companies fluctuate according to market conditions. Just like when you pick up a stock, you should conduct thorough valuation studies and make the purchase at the right time. Overpaying just makes success more difficult.

3. Location, location, location
Geographic distance is a bigger hurdle than many people think in getting two companies integrated and properly managed. Take a close look at where the acquisition target’s key offices, as well as primary business partners and customers, are located globally.

4. Check out the acquisition target’s patent portfolio. The number and quality of the acquisition target’s patents are vital statistics because they are an objective measure of a firm’s innovation capability. In the tech industry, this closely reflects a company’s potential for long term growth and market leadership.

THE BUILD ROUTE

1. Create the right environment
When people are motivated, the job gets done. Before all else, management must build a culture that fosters and encourages innovation. Whenever possible, reward employee loyalty by grooming leaders from within.

2. Invest to get ahead
It’s fair to assume that the technology you are trying to build is complementary but different from what you already have. That means you probably don’t have the most suitable people within your current organisation to do the job. Don’t pinch pennies – go out and hire for the key positions. This will enable you to develop the desired technology quickly. The ability to enter a new market swiftly is a key determinant of whether a venture will ultimately be successful.

3. Think beyond the technology
Don’t just develop the technology. Expand your ecosystem of business partners at the same time, so that you will have the right infrastructure to support the new business when it is ready to roll.

4. Ensure adequate resources to support the venture
Make sure your senior management pay enough attention to this new technology, even though the company has to devote the bulk of its R&D resources to the products that are contributing to most of its revenue now.

5. Cultivate broad-based support
Explain the business potential of the new technology to your current R&D teams, and get their buy-in. Because the new technology is complementary to your existing ones, cross pollination of ideas among research teams is vital, and that can only happen when everyone is on board with the new corporate direction.

Put some of these pointers to practice, and your efforts to grow your firm’s technology portfolio could make a broader impact.

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