When a company needs a capability it does not have, such as a technology, a market or a product line, it has three ways to get it. It can buy a company that already has it, build it internally or partner with someone who has it. Each path moves at a different speed, costs a different amount and gives a different degree of control.
Three cash curves
Buying is fast but expensive: a large payment on day one, including a premium, followed by strong cash flows. Building is cheap per year but slow, with several years of investment before revenue arrives. Partnering costs little up front and starts earning quickly, but the value is shared with the partner.
Looking only at the cumulative cash after eight years, building wins with 440 million, ahead of buying with 380 and partnering with 320. But money arriving in year eight is worth less than money arriving in year two. Discounted at a 10% cost of capital, the order changes completely: partnering is worth 187 million, building 155 and buying only 87, because the acquisition premium is paid on day one and the build takes six years to recover its cost.
Beyond the numbers
- Buy when speed is decisive, the target's capability is hard to replicate and you can integrate it without destroying what made it valuable.
- Build when the capability is core to your future advantage, you need full control and the market will wait for you.
- Partner when you need to learn quickly, the risk is high or the capability is valuable but not core, and keep an option to buy later.
Bartor S.
Founder
