Latin American Agtech Deals from 2010 to 2020

Latin American Agtech Deals from 2010 to 2020

The agriculture technology (agtech) industry encompasses all companies that apply technology to farming activities. Technology-assisted farming, from complex water management solutions to modern genomics, has been around since the early ages of civilization. Advancements in agtech drove the food industry, and the management systems developed for farms and crops can be applied to other industries, like resource management and big data. The agtech industry can be segmented into inputs, production, selection, processing, distribution, and marketing. The inputs segment accounts for over 80% of the capital invested in Latin American companies.

With agriculture pivoting toward relying more on technological advancements and their applications, venture capitalists and investors have increased cross-border operations with Latin American companies in agtech.

This report outlines the announced investments made in Latin American agtech companies between 2010 and 2020. The focus is placed on deal count, volume, and industry with spotlights on the most active investors, such as SP Ventures, NXTP Ventures, and The Yield Lab, as well as the deals closed by Produquimica Industria e Comercio.

Segments Overview

A Closer Look into the Agtech Value Chain

 

Inputs

Inputs is the sector’s largest and broadest segment. Companies that deal in agtech inputs work with seeds, agrochemicals, and equipment for farming and irrigation. Working with seeds includes genomics and biotechnology; agrochemicals deal with pesticides, fertilizers, and foliar feeding.

Production

Production and cultivation are arguably the most crowded agtech segments, yet they receive a small share of the total investments. Cultivation companies that include data analysis systems or incorporate machinery into their process have a better chance of securing investments, since traditional farming has not seen a notable growth rate over the last decade. Vertical farming, indoor farming, and hydroponics follow a rising trend in agricultural regions, such as Latin America, rural China, and Egypt.

Selection and Processing

If the raw material management allows for it, the selection and processing segment is usually integrated within the same firm in the value chain This segment includes the storage, manufacturing, or exportation of secondary or end products ready for the consumer. Exportation is the end goal for most producers and processing plants within Latin America, and capital invested into such companies is used for operational expenses. There are many advancements in raw food ingredients processing, yet minimal research and development expenditure occurs in Central and South American agriculture companies.

Distribution and Marketing

Logistics companies in the food and beverage business require cold storage units for most agricultural products. Latin American logistics companies deal with rot, odors, and pests. Distribution companies with an international presence partner with agrochemical companies for food preservation and transportation. Capital sources invested in 150 B2B firms, as opposed to less than 50% of B2C companies.

Marketing companies brand products for different sources. Most Latin American marketing firms promote local produce, while the international community advertises foreign, imported ingredients.

Latin American Market Overview

Agtech Deals from 2010 to 2020

  • Vale (metals and mining) acquired Vale Fertilizantes for $1.2 billion in 2011, making 2011 the year with the largest amount of capital raised for agtech companies in Latin America.
  • Drought issues prevented the closure of agriculture deals between 2010 and 2012, and besides Vale, few other firms were active in financing. The growing trend continued between 2013 and 2018 and is expected to resume in 2021.
  • 2018 was the most active year in the period with over $1.4 billion deployed across 57 deals.

Value Chain Spotlight

Agrochemicals in Inputs

Foreign capital sources actively invest in chemical production companies and research and development activities in Latin America. These investments made agrochemicals the largest segment for Latin American agtech companies in the last decade. Companies researching or implementing agrochemicals in the Latin American region do so with fertilizers, such as early-crop supplements, pesticides, and foliar feeding.

  • A total of 29 agrochemical companies in Latin America were actively involved in a private placement between 2010 and 2020. In 2015, several companies from Argentina, Brazil, and nearby countries were sanctioned for their use of chemicals in their crops. Several cancer cases in these countries were attributed to chemical exposure. This led to a notable drop in the companies actively looking for capital to acquire or produce similar chemicals.
  • Companies that could not withstand this period were forced to declare bankruptcy or sell their assets. This increased the M&A activity over the next four years, with similar companies acquiring businesses like Produquimica Industria e Comercio and Rizoflora Biotechnology due to their strategic value. During this period, eight Brazilian companies and two Argentinean agrochemical companies were purchased.
  • Venture capitalists and private equity firms invested $5 billion in agricultural chemical deals in Latin America, or over 85% of the total capital deployed for agtech deals in the region.
  • Deals with agrochemical companies in Latin America accounted for 64% of the total capital raised. In spite of the 2015 decrease in the number of deals, agrochemicals had more deals than all other verticals combined. Only 38 deals were completed for agrochemical firms, or 11% of the total deal count.

Value Chain Spotlight

Cultivation in Production

Agtech cultivation is a rather broad segment that encompasses early- to late-stage crop management, data analytics, chemical implementation, genomics, and care services. Cultivation is the foundational sector in Latin American agtech, yet it is second to agrochemicals. This is due to the number of companies in the region that do not have enough R&D expenditures to attract external private placements. Cultivation companies in the region tend to grow vertically toward logistics and distribution as opposed to technology and data. As a direct result, cultivation receives a consistent amount of capital and predictable trends in deal count for the Latin American region.

  • Cultivation deals raised 19% of the total capital for Latin American companies between 2010 and 2020. Thirty-nine cultivation companies in this region participated in 55 deals. This showcases the importance of cultivation in Latin American countries, as more than half of them were active in more than one round of investments.
  • Most investment activities halted in 2015 due to the rising health concerns of chemicals and pesticides used on crops. Companies that dealt with cultivation followed the same trend.
  • Agro Amazônia Produtos Agropecuários, a Brazilian company, was forced to sell to Sumitomo Corporation in 2015 with a 0.35 revenue multiple. Another company was marketed in 2016. After 2015, venture capital investment trends normalized until the 2020 COVID-19 pandemic, which introduced a 50% decrease in investment activities.

Agtech Deal Investment Forecasts Moving Forward

Latin American agtech startups set a new record for the decade in the first quarter of 2020.

Since the entire sector benefited from the concerns around food security due to the COVID-19 pandemic, new records are expected for this new decade. Jahani and Associates expects financial activities to grow gradually through 2021 and reach record numbers by the first quarters of 2022. Chemicals and early crop care are developing industries in Latin America. Trends show that manufacturing and chemical research and development will have the highest deal counts in the next coming years.


J&A Report: Regional Focus: Why Single-Origin Coffee Matters

J&A Report: Regional Focus: Why Single-Origin Coffee Matters

Specialty coffees have been on the rise for coffee connoisseurs. This trend has boosted general knowledge and enthusiasm for single-origin coffees. In this report, J&A briefly provides an introduction of single-origin coffee, outlines the differences in flavor profiles by region, compares single-origin with blended or mixed coffees, and lays out overall trends.

What Is Single-Origin Coffee?

Single-origin coffee comes from a single producer, crop, or region in one country. Single-origin coffee is often called single-farm, single-estate, single-malt, or single-vineyard coffee. Coffees that are not single-origin are blends, which include more than one single-origin coffee. Due to the one-time harvest in the year, single-origins are only available during specific times throughout the year.

Because tracing single-origin coffee leads to a single place, they have a distinct flavor based on the process from growth to processing of the region. Many factors influence flavors including botanical variety, soil, climate, altitude, and shade. Processing methods also vary by region and influence the final taste.

FIGURE 1: Coffee Flavor Profiles Along the Coffee Bean Belt


Single-Origins Versus Blends

Blends are a mix of two or more single-origin coffees from different regions. As such, the tastes vary, and the origin is not as distinguishable. Blends are more flexible in the market but cannot be sold at the same price or compete against single-origin coffees in niche markets. Blends are usually cheaper and found most commonly.

Single-Origins Coffee Taste

Single-origin coffees taste different than blends in the market. Light roasting single-origin coffee develops subtle aromas and distinct tasting notes. The body is more tea-like, and the flavors are fruity and citric rather than nutty or chocolaty.

Single-Origin Coffee Popularity

  • In the first half of 2019, the single-origin coffee market resulted in $182 million in grocery sales.
  • In 2020, these sales grew by 4%, outpacing the total premium coffee segment.
  • Among coffee drinkers between the ages of 25 and 49, 81% are willing to pay 10% more for single-origin coffees, incurring financial rewards for the many smallholder farmers who provide 80% of the world’s coffee beans.

The rising amount of cafés offering alternative brew methods has influenced the current interest in single-origin coffee. Single-origins are particularly popular because of their traceability. The impact of single-origins affects farming methods, and specialty farmers are developing and improving high-quality crops in response to demand. Some farms and processing plants experiment with their varietals or cultivars selection, control over the growth stage, harvesting time and technique, and the milling and processing method.

Outlook for Single-Origin Coffee Moving Forward

This report outlined what specialty single-origin coffee is and what specifics categorize a coffee as such. The difference in atmosphere and preferred processing methods within regions produce many flavors, making single-origin coffees a niche market for coffee connoisseurs. Blends are a mixture of various single-origin coffees that are indistinct from a specific region’s flavor profile. The rising sales and marketing trends for specialty coffees boosted the market for single-origins by 4% in 2020. J&A expects this trend to maintain as the coffee industry raises awareness for farm owners and consciousness towards processing methods.

Source: Counter Culture Coffee, MyRecipes, Perfect Daily Grind, Tripe Pundit, and Forbes


Jahani and Associates Industry Report: Specialty Coffee Testing

Jahani and Associates Industry Report: Specialty Coffee Testing

The global specialty coffee market grew by 11.8% in 2020 despite drastic contractions in the restaurant and hospitality sector1

The market is set to expand with a compound annual growth rate of 13% between 2021 and 2024. Specialty coffee is an artisan industry with unique scoring methods and flavor profiling designed to test the quality of each cup. This article will provide insights into the industry-standard coffee testing process and the rules and regulations regarding specialty coffee.

Coffee Testing: The Official Process

The Speciality Coffee Association2 has set specific guidelines for coffee sampling to ensure uniformity in testing standards. Beans are roasted, sampled, and then assigned a grade (out of 100) based on numerous characteristics and criteria.

Samples are roasted for between eight and 12 minutes and allowed to rest for at least eight hours2. The beans must be consumed within 24 hours of roasting. The Speciality Coffee Association makes recommendations for the size of the cup, the pouring method, and the measurements used when testing beans. At least five cups of coffee are prepared from the samples to evaluate the beans’ flavor profile and unique qualities.

Sample Testing Criteria

Scoring is based on 10 defined categories2. The fragrance of the beans when pouring, roasting, and tasting is the first noted quality. The sweetness, body, balance, acidity, and the beans’ flavor profile contribute to the majority of the total score.

Homogeneity of the coffee cups, a lack of defects, and the brightness of the coffee are the remaining categories. The overall perception of samples is what grants additional points.

The points in each category are assigned as follows: six points for satisfactory, seven for very good, eight for excellent, nine for outstanding, and 10, being the top score, for perfect.

To be classified as specialty coffee, coffee beans must score 80 or higher 2. Beans with a score of 80 – 84.99 are considered very good; between 85 – 89.99 are considered excellent. The top 1% of all specialty coffee beans hold outstanding scores of 90 or above.

Coffee Testing: Flavor Profile

Coffee sampling and tasting notes are subjective, but the coffee tasters’ flavor wheel denotes the standard categories of flavors commonly experienced by coffee drinkers.

The coffee tasters flavor wheel was designed by World Coffee Research in 1995.

Simplified Coffee Tasters’ Flavor Wheel

The wheel outlines nine flavor categories with numerous sub-categories. Desired flavor profiles include fruity, sweet, nutty, and cocoa, and various spices. Unwanted flavors such as chemical or sour notes will lead to lower testing scores. Coffee flavors are uniquely perceived, and individuals with different tasting pallets may pick up specific notes over others. Generally, specialty coffee is roasted in a manner to highlight the natural flavor profile of the beans.

For the accurate comparison of beans, the testing of specialty coffee is a standardized and repeatable system.The quality of specialty-grade coffee beans is verified to ensure consumer confidence. The rise of specialty coffee will continue as global coffee drinkers gain access to new varieties, regions, and flavor profiles.

Sources:
  1. finance.yahoo.com/news/research-report-specialty-coffee-shops
  2. sca.coffee/research/protocols-best-practices
  3. worldcoffeeresearch.org/work/sensory-lexicon/

J&A Report: Coffee Processing: How Washing Affects Taste

J&A Report: Coffee Processing: How Washing Affects Taste

The process of washing coffee consists of removing its fruit layers before drying. Coffee is washed with water to remove the mucilage after the beans have been fermented. Mucilage is the soft, sticky layer that is responsible for sweetness.

Washing coffee beans results in a clean flavor profile. It is an ideal processing method for mild and bright brews. Removing as much mucilage as possible produces coffees with a light body and a bright, clean cup. The result is a fruiter, acidic flavor, while unwashed methods yield a heavy, smoother, and sweeter bean.

Washing Coffee Process

Before starting the process, weighing raw coffee cherries is necessary to calculate the yield in volume and weight. Then the pulp is removed using mechanical pulping machines. Inside the machinery, a blade cuts the cherry open, extracts the seeds, and discards the empty cherries. The coffee beans are set aside for mucilage removal.

The mucilage is composed of different sugars and alcohols that affect the flavor of the bean. Leaving this layer entirely or partially intact produces sweeter flavors. After the removal of the mucilage layer, coffee dries to prepare for the roasting process.

FIGURE 1: Coffee Washing Process

Washed Versus Unwashed Coffee Taste

Washed Coffee

Washed coffee has a cleaner taste than unwashed coffee. After the removal of the mucilage layer, the focus is drawn to the actual bean’s flavor. The result is a fruity-tasting coffee with a slight, fresh acidity. Specialty coffee experts prefer clean coffee because its flavor reflects that of the real bean. Properly washed coffee develops fundamental flavors, which vary based on the origin of the coffee bean.

Unwashed Coffee

In unwashed coffee, processing methods alter the taste of the bean. Unwashed coffee has a heavier body; it produces complex and smooth-tasting coffee. Due to its dense body and sweet characteristics, the taste often has hints of berries or tropical fruit.

Other Processing Methods

Honey Process

Central America is known for the use of the honey process. Beans are left with some mucilage when drying. Honeyed coffees taste naturally sweet and bright—a combination of unwashed and washed coffees.

FIGURE 2: Classification of Honey-Processed Coffee


Unwashed Coffee

In unwashed coffee, processing methods alter the taste of the bean. Unwashed coffee has a heavier body; it produces complex and smooth-tasting coffee. Due to its dense body and sweet characteristics, the taste has hints of berries or tropical fruit.

Anaerobic

Anaerobic means without oxygen. Anaerobic coffees are renowned high-end coffees that undergo a process similar to the washed process, but the fermentation happens in sealed tanks. Anaerobic-processed coffees have wild, unexpected, and complex flavor profiles.

Carbonic Maceration

This is similar to the wine-making process; the fermentation of the cherries happens during the harvest in carbonic maceration. The process breaks down the cell walls of the fruit flesh from inside out. Beans get soaked in all the flavors from the mucilage during the fermentation. Carbonic maceration yields varying flavor profiles and aromas like red wine, whisky, banana, and bubblegum.

Giling Basah

The Giling Basah method is typical of Indonesia. Giling Basah is a similar process to the washed process, but the beans are dried partially only. After 35 – 40% drying and elimination of the mucilage, the coffee beans need to be dried again. Giling Basah yields earthy flavors like wood, mustiness, spice, and tobacco.

Washing Coffee Beans to Improve Taste

A variety of flavors result from minor alterations in the duration of each step. Sorting and pulping remain the same for the various methods of the washing process. It is during the fermentation phase when flavor profiles develop, depending on the amount of mucilage left to react on the bean and the duration of fermentation, and form new flavor compounds. After being washed, the coffee beans now have distinct tastes based on these stages, their origin, and their variety.

Sources: Coffee Cartel, Coffee Wiki, Paulig


J&A Report – Coffee Processing: How Roasting Affects Taste

J&A Report – Coffee Processing: How Roasting Affects Taste

Coffee roasting is an industry forecasted to generate $320 billion in revenue in 2021. The market will grow with a compound annual growth rate of 8% in the forecast period of 2021 to 2025. Coffee roasting is the process of preparing green coffee beans for grinding and consumption. Different roasting methods affect the overall flavor. J&A has outlined the most relevant considerations for coffee roasters and the impact on the final product.

  • The United State is the world’s largest coffee roasting nation and is forecasted to generate $67 billion in 2021.
  • The volume of roasted coffee is forecasted to increase by 4% in 2022 and is set to total over 6 billion tons by 2025.
  • There are three main phases in coffee roasting: drying, browning, and development. The type of roast (light, medium, and dark) affects the color, flavor, and caffeine content of a coffee bean.

FIGURE 1: Coffee Roasting Process

Common Roast Coffee Types and Their Flavors

Roasting beans converts flavorless green beans into a tasty cup of coffee. The accomplishment of these profiles comes through the various roast types. Light roast styles result in a sweet, fruity, acidic cup of coffee. Aggressive roasts yield dark, bitter, and strong cups of coffee.

The total roast period and duration of each stage are relevant factors for the final taste. Faster roasts yield more aroma compounds, but the beans are more prone to burn this way. Shorter roasts produce more aroma compounds.

Light Roast: Half-City Roasts
Light roast coffees do not reach their first crack, which usually happens in the development stage. Lightly roasted beans typically hold fruity, floral, and acidic flavor.

Medium Roast: City Roasts

Medium-roast coffees have been roasted between the first crack, at a temperature of approximately 400°F, and before the second crack at 428°F. Medium-roast coffee has a smoother, more-balanced flavor with a slight bitterness when compared to a light roast.

Medium-Dark Roast: Full-City Roasts

During and after the second crack, medium-dark roasted beans reach an internal temperature of 437 – 446°F. This temperature brings out the oils on the beans’ surface. These roasts have a richer, fuller flavor, more body, and less acidity.

Dark Roast: French or Italian Roasts

Dark-roast coffees are roasted past the second crack to an internal temperature of 464°F, which is the highest possible without ruining the bean’s flavor. The temperature and time on the roasting process pulls oils from inside the coffee bean to the outside, giving them an oily shine. Dark-roast coffees taste smoky, bitter, and burnt.

FIGURE 2: Roast Types

Roast Coffee Segment Overview and Forecasts

Many factors contribute to the flavor experienced with a cup, and roasting is one of the most important elements. Roasting can produce varying bean color and taste, oil or not surfaces, and different amounts of caffeine depending on the roast time or temperature reached during any of its stages. The process to achieve certain flavors in a cup of coffee is specific. Expert roasters achieve natural flavor profiles through the production process. Light roasts present zesty and acidic flavors. On the other hand, dark roasts present bitter and smoky flavors. J&A expects the USA will keep on leading the roasting market share for the coming years. Strong growth in coffee consumption and volume produced ensure that income generated from roasting will increase in the coming years.

Sources: TeaCoffeeCup


J&A Industry Report: Coffee Value Chain: From Crop to Cup

Jahani and Associates Industry Report

Coffee Value Chain: From Crop to Cup

The coffee production process can be broken into three key phases: farming, processing, and retailing. Within these phases, the coffee product is harvested in its original form (a cherry-like fruit), then processed, dried, roasted, ground, and finally turned into the final product we drink every day. This article breaks down the coffee value chain within these phases from crop to cup. Lastly, we review the price of a coffee bean from its original cherry form to the final cup, analyzing its evolution, and the justification for a 10,000% price increase across the chain.

FIGURE 1

Farming

Cherries: coffee is grown in trees approximately two to four meters in height. The trees flower two to three years after being planted. After the tree flowers, green fruits appear on the branches. The green fruits ripen to a deep red color after four to eight months and are then ready to harvest.

Processing

Green beans to roasted beans: After the fruit is harvested and taken to a processing plant, the fruit undergoes refining and drying steps to turn it into a green bean. These green beans are then roasted to become the beans consumers are familiar with from stores and coffee shops. This roasting step is what creates a light or dark roasted coffee. Prior to roasting, there is no difference between light and dark roasts. Additional steps in this process include wet processes such as pulping, demuxing, washing, sorting, coffee parchment drying, storage, threshing, sorting, cupping, and packing. Dry processes include storage, threshing, and sorting.

Retailing

Once the coffee is harvested, dried, processed, and roasted, it is distributed to the end consumer or retail store where it is then ground and brewed. Roasted coffee can be modified into a variety of products such as soluble coffee, decaffeinated coffee, coffee liqueur, extracts and essences, or pure caffeine.

Opportunities to Increase Quality

Each step in the process brings opportunities to increase quality, and are summarized below.

Farming: Altitude and Shade 
  • Shade-grown coffee and coffee grown at high altitudes create higher quality beans compared to those grown in direct sunlight.
  • Fertilization techniques can also affect quality by impacting the soil.
Processing: Wetness, Temperature, and Fermentation
  • The wet process produces higher quality coffee with a cleaner and more consistent flavor than other methods.
  • The fermentation process within the wet phase makes flavor profiles more intense or sweet.
  • The best way to store green beans during the dry phase is in a contamination-free warehouse with average relative humidity of 10.5-12% and a temperature of 26°C.
  • Roasting green beans at a lower heat produces coffee that releases more distinct scents, aroma, and volatile oils. These roasting differences are mostly appreciated by specialty coffee consumers.

Pricing: Increasing Value by Over 10,000%

FIGURE 2

Farming ($2 – $3 per kilogram)

Farming raw fruits is the least expensive step in the coffee value chain. This is driven by many factors, including a high amount of supply, low labor costs, some unfair practices against farmers to maximize profits, and pricing wars among farmers themselves. It is not within the scope of this report to analyze the political and economic dynamics the coffee industry has on less wealthy nations.

Processing ($3 – $30 per kilogram)

Processing to generate the green bean is usually done near the farm. Green beans have a stable shelf life of nearly a year. Roasting green beans can be done anywhere in the world, and usually takes place nearer to the end consumer. Throughout the world local roasteries order green bean coffee from a variety of international locations and then sell that coffee to regional shops, stores, and consumers.

Retailing ($150 – $200 per kilogram)

Retailing is the phase of the coffee value chain that is most sensitive to marketing and consumer behavior. Companies like Blue Bottle Coffee have built large enterprises on high-quality coffee, careful marketing, and premium retail locations to command a price premium in the market. Blue Bottle Coffee was purchased by Nespresso in 2017.

FIGURE 3: Differentiators by Region

From Crop to Cup: An Evolution of Price and Product

The coffee value chain can be broken into three steps to promote high-quality products across the world. America and Asia use the wet processing method, compared to Africa, which uses the natural drying method. The use of different processing techniques determines coffee’s quality, aroma, and flavor. These characteristics add value and set the final cost in the global market. Coffee pricing increases dramatically as it moves away from the raw product and into the consumer’s cup.

Sources: 

  • https://cafesabora.com/es/proceso-del-caf%C3%A9-c%C3%B3mo-se-procesa-el-caf%C3%A9-que-llega-tu-taza
  • https://www.ncausa.org/About-Coffee/10-Steps-from-Seed-to-Cup
  • https://patriotcraftcoffee.com/processing-methods/#:~:text=In%20the%20wet%20process%2C%20water,is%20still%20on%20the%20bean.
  • http://www.fao.org/3/X6939E/X6939e03.htm#:~:text=In%20most%20of%20the%20African,to%20a%20better%20quality%20coffee.
  • https://theexoticbean.com/blog/how-is-se-asian-coffee-grown-and-processed/
  • https://www.alibaba.com/showroom/robusta-cherry-coffee-price.html
  • https://www.statista.com/statistics/675807/average-prices-arabica-and-robusta-coffee-worldwide/
  • https://perfectdailygrind.com/es/2018/08/08/esto-es-lo-que-cuesta-producir-cafe-en-latino-america/
  • https://es.dailyforex.com/forex-articles/2017/12/precio-del-caf%C3%A9-invierta-en-caf%C3%A9-3-de-diciembre-2017/87665
  • https://mycoffeebox.com/taza-de-cafe-el-costo-y-su-impacto-en-la-economia/
  • https://www.ico.org/prices/pr-prices.pdf
  • https://es.investing.com/commodities/us-coffee-c-historical-data
  • https://www.usnews.com/news/blogs/data-mine/2015/09/29/americans-pay-an-average-270-for-coffee-while-tipping-20-percent#:~:text=A%20cafe%20mocha%20is%20the,an%20average%20price%20of%20%242.62.
  • https://www.amazon.com/-/es/Lavazza-Super-Crema-Espresso-embalaje/dp/B000SDKDM4/ref=sr_1_1?_encoding=UTF8&c=ts&dchild=1&keywords=roasted+coffee+beans&qid=1621020490&s=grocery&sr=1-1&ts_id=2251592011
  • https://www.amazon.com/-/es/Ethiopian-Yirgacheffe-Oromia-entero-tostado/dp/B07ZJRW57X/ref=sr_1_13?_encoding=UTF8&c=ts&dchild=1&keywords=roasted+coffee+beans&qid=1621020490&s=grocery&sr=1-13&ts_id=2251592011

Enhance Your Company’s Strategic Assets to Increase Value

Enhance Your Company’s Strategic Assets to Increase Value

What are a Company’s Strategic Assets?

A company’s strategic assets sit at the intersection of tangible and intangible assets and create recurring benefits, are unique, and difficult to imitate. Such strategic assets can include intellectual property, customer relationships, proprietary business processes and algorithms, novel revenue streams, and brand value.

Why focus on strategic assets?

The definition of strategic assets is related to the accounting term goodwill, which is an intangible asset that results from the acquisition of a company at a premium value. The premium is the amount an acquiring company pays for a target company in excess of the target company’s book value. Strategic assets have historically been difficult to quantify, but are known to make a company more valuable.

Corporate buyers have been placing increased emphasis and value on strategic assets compared to tangible assets like property, equipment, and manufacturing facilities. Corporate resources applied to build a robust set of a company’s strategic assets are increasingly providing a higher return on investment than those focused strictly on earnings growth.

High-profile transactions such as Facebook’s acquisition of WhatsApp, AT&T’s purchase of DirecTV, and Campari’s acquisition of Wild Turkey all demonstrated the high percentage of purchase price allotted to goodwill due to the seller’s strong set of strategic assets.

According to research by Carol Corrado, “companies put far more money into non-physical assets, such as customer databases, than in building new factories. In 2014, companies invested the equivalent of 14% of the private sector’s gross domestic product in intangible/strategic assets. The investment in physical assets was about 10% of that sum, which is essentially the reverse of 40 years ago when 13% of the private sector GDP went to tangible/physical assets and only 9% to intangible/strategic assets.”

There is currently more than $2.5 trillion in goodwill on corporations’ balance sheets (source: Time magazine). Why? As corporate awareness of intangible asset value is increasing, fewer companies are pursuing acquisitions to add production facilities and other tangible assets. For example, when Microsoft bought LinkedIn, it was almost exclusively for their intangible and strategic assets, such as their brand, website platform, user/customer data, and perhaps the management team and their connections (e.g., Reid Hoffman!).

How to determine which company’s strategic assets to pursue?

Over the past few months, Gates and Company, in conjunction with Jahani and Associates, have been working to determine the strategic assets that help companies achieve premium valuations that can be identified and developed. Knowing that the concept of strategic assets would not benefit every business, and would certainly vary sector by sector, the team began by reviewing M&A deals in the tech sector. Over 500 transactions that closed between 2010 and 2016 were analyzed to determine strategic asset characteristics and goodwill drivers.

Some of the tech M&A deals reviewed for this initiative included:

  • Google acquired Waze for $969 million and allocated $843 million to goodwill
  • Yahoo! paid $990 million for Tumblr, with $750 million going toward goodwill, including $182 million for customer contracts and relationships
  • Facebook’s $17.2 billion acquisition of WhatApp had an astonishing $15.3 billion recorded as goodwill
  • Microsoft acquired LinkedIn for $27 billion and allocated $16.7 billion of its purchase price to goodwill; and when it acquired Skype for $8.6 billion, $7.1 billion went to goodwill

In each of these examples, the target company’s strategic assets (IP, customer relationships, brand, etc.) were valued significantly higher than their tangible/physical assets (plants, property, equipment, etc.). Results from the tech sector analysis indicated that companies with recognizable strengths in social media, web advertising, and data analytics consistently received valuations above market. Additionally, an active user/subscriber base was a driver in over 60% of the acquisitions.

Corporate leaders, business owners, and investors face a critical issue: in order to maximize value, they must enhance the set of strategic assets in their company and/or portfolio of businesses. A thorough analysis of transactional data to identify strategic asset characteristics and goodwill drivers must be considered in conjunction with corporate core competencies, market dynamics, and economic trends to build out the most relevant value-enhancing strategic assets.

About Gates and Company

With offices near Philadelphia and Munich, Germany, Gates and Company is an investment banking and management consulting firm dedicated to helping companies grow. With an impressive track record of helping numerous companies reach their goals, Gates and Company specialize in M&A, market research/analysis, growth strategy formulation, business plan development, product/venture launch, and financial advisory services.

Gates and Company’s management consulting team has invested significant time and resources to refine and validate its methodology of determining strategic asset characteristics and goodwill drivers in the tech sector. Current efforts are underway in the health IT sector. By reviewing market dynamics and hundreds of M&A deals on a sector-by-sector basis, Gates and Company offer these insights to their clients so they can better understand how to identify and develop an optimized set of strategic assets. Gates and Company’s investment banking team helps companies seeking liquidity with comprehensive M&A services to sell businesses or business units, including identifying and assessing those potential buyers most likely to be attracted to a company’s current and developing set of strategic assets.

For more information about Gates and Company, visit gatesandcompany.com.

Company’s Strategic Assets to Increase Value Articles


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