Why is this so?

At Projects RH, we often deal with early-stage companies that understand their best way to create shareholder value is through a trade sale. They are generally looking for USD 15-35 million. ExxonMobil’s proposed acquisition of Pioneer Natural Resources for USD 60 billion is a significant acquisition for Exxon, which has a market cap of USD 436 billion. In recent years, Exxon has been profitable and has good cash reserves and credit lines.

Growth through acquisition is a common strategy in many sectors, including financial services, IT, and resources. At Projects RH, we are often asked by our clients “Why is this so?”. It’s important for our clients to remember that their investors are seeking a liquidity event and may have different goals than the founder’s vision of remaining in the top chair for 20 years. Therefore, it’s crucial for management to become aligned with its investors. Additionally, major companies typically don’t want to be passive investors. They may be willing to pay a higher price for an asset due to their different needs, visions, and capacities. This trend is particularly prevalent in technology, food, green metals, and energy sectors.

Playing in the Majors

In the case of resource companies, particularly those that manage a portfolio of depleting resources, they must find a replacement for every unit of production. Thus, whether a company deals with gold, oil, or metals, one of its primary performance measures is how long it can sustain the business at the present rate of extraction or more. Such sustainability becomes even more crucial when global demand shifts, such as the rise of “green metals”, or when proximity to the market supersedes straightforward transportation economics.

Having worked in the extractive industries for much of my career, I have observed that a significant reason why major companies invest in projects (commonly referred to as farming in) is to buy the project from the existing shareholders. I believe that majors are willing to pay for derisked assets, along with strong and effective operational technologies, lower cost of capital, and strong marketing arms to increase the project’s likelihood of success and profitability.

Many of the so-called majors now see the acquisition path as more cost-effective and allowing for brighter selectivity in the assets they buy. In many extractive industries, they may only want large assets, not a large portfolio of small, sweet assets, but those they can manage with relative ease. This view of the world has led many of them to reduce their exploration budgets, knowing that they can buy de-risked assets. Today, the issue is not just one of geology but also environmental and cultural acceptance of the projects. If I buy a producing asset that is ripe for expansion, many of the issues with compliance, environmentally acceptable practices, and the local community have already been solved.

Buy, not duplicate!

This approach to growing the company is also common in the technology space, where companies like Google and Microsoft buy complementary technologies that they know will add value to either their marketplace or one of their products. Thus, it is time and cost-effective to buy the company rather than to attempt to duplicate what it does. Google’s acquisition of Fitbit is a classic example of adding and keeping profitable market share via acquisitions.

Why investors invest

At Projects RH, we continue to work with several of our alumni who, having raised their initial capital, want to continue growing. Many of their founders and especially their early investors have an investment horizon of 3-5 years. They expect their IT, FinTech, mining or energy business to work towards an IPO but be ever mindful that the best value may rest in selling their successful business to a major player. This buyer could be a large corporation, a venture capital fund, a foreign company keen on entering their market or simply wanting to add geographic diversity.

Strategic acquisition is a significant reason why investors invest, and for all the “juniors” across the business sectors, they will hope this continues.

By Paul Raftery, CEO Projects RH, Sydney.

————————————–

See Thomas, L. and Cooper, L.; “Exxon Closes on Mega $98BN Oil Deal”, The Weekend Australian, 7-8 October, 2023.