A fourth option ? rowing the company In other ways by acquiring or merging elsewhere ? but there Is not enough Information In the case facts to discuss the legitimacy of this strategy. Furthermore, without detailed financial and Industry Information, It Is Impossible to determine whether selling the unprofitable services Dillon would be the correct course of action either. As such, this report will focus on whether Paragon Tools should acquire Antibiotics or grow its business organically, based on the facts presented in the case.
First, it is important to look at the deal from the perspective of the business life cycle. As Knick mentions, Antibiotics is a fast-growing business. Its technologies demonstrate significant potential, but are far from fully implemented. The case mentions the possibility that the software technology of Antibiotics will become the industry standard, indicating that the company and in fact, the entire industry ?C,-. ?¬¦ are in the growth stage of the business life cycle. Indeed, this shows why Antibiotics is such a prime target for acquisition.
The case facts indicate that several of competitors are already involved in the manufacturing services industry (making market domination unlikely), but the optimistic perusal of the technology of Antibiotics would give Paragon a distinct first mover advantage. The key driver for this acquisition should be the innovation and first mover advantage that Antibiotics represent. Though it is developing similar technology In house, the threat of a close competitor acquiring a potential industry standard is nearly enough to push them into action.
Paragon must consider whether making such a large acquisition that will undoubtedly put further pressure on earnings and garner further concern from shareholders should be made room a purely reactionary standpoint. At this stage, acquisition would appear to be a mostly defensive move as no thoughts of acquisition existed before Bellows & Samson showed interest. Furthermore, a first mover advantage Is useless to Paragon If the technology they acquire does not easily transfer over Into their operations.
That the engineers could not present even an approximate telling for this should be extremely concerning. Paragon Itself appears to be a company In the mature stage. Its mall operations (and profit drivers) come from the sale of manufacturing products. The case facts seem to indicate that this is a market with low levels of growth and comprised of legacy consumers. However, the COOP mentions at one point that customers are themselves suffering with profits. This could indicate that the industry is approaching decline.
The fact that several competitors nave already Deign to make moves Into ten maturating services steward industry indicates that Paragon is in need of some sort of growth strategy. Knick? idealistic transformation from a manufacturing company into a high-tech company would be expensive, risky and require massive overhauls of company ultra and capabilities, but it may be Just what Paragon needs to avoid future stagnation and decline. My second framework for analysis was Five Force Model (Appendix A).
Using this, I examined the viability of the emerging services software industry. Key takeaways from this analysis are the initially low barriers to entry and limited customer base of the industry. Currently, there are virtually no barriers to entry for companies looking to enter the industry (other than high capital costs). Until a standard is established, companies will fight for marketers with numerous new entrants. Paragon might consider patents for the technology of Antibiotics, but the service provided is too general for patents to be of much use.
Not to mention that several competitors would be considering this strategy as well. Also of concern is the limited customer base of the industry. The market for these services is identical to the market for manufacturing tools. As aforementioned, this market is mainly legacy customers and the COOP has expressed concern that these customers would be able to afford expensive servicing technology. All of these concerns make my support of the deal tenuous. As Ken Favor put it, a good acquisition must have a good fit, a good price and excellent execution.
As this stage, Knick knows nothing about any of these three criteria. Antibiotics might be completely useless to Paragon and its price might be inflated by competitor interest. There are too many unknown variables. It is clear that Knick wishes to maintain the growth, especially as the current market begins to stagnate. Nevertheless, it would be unwise to make a move for a sake, especially one that is based on reaction. This is especially true when considering how few acquisitions can truly be considered successful.
My recommendation for Paragon is to not pursue the acquisition of Antibiotics ? except to inflate the price that competitor Bellows & Samson. I believe that organic growth of the own services division is the much less risky and more feasible route. Furthermore, Paragon could seek to acquire less expensive and smaller technology companies that are rivals to Antibiotics. Paragon could even acquire several and attempt to garner a large chunk of the emerging market. Such actions could provide similar benefits to acquiring Antibiotics, without the financial headache.