What is Strategic Investment?
Strategic investments are a type of corporate investment that is made with the view of acquiring top talent, technological or market knowledge and other competitive advantages that help a company to differentiate itself from its competitors. This allows it to boost the return on its shareholders’ equity and enhance its market value and competitiveness. It refers to a form of investment that a company makes in order to enhance its own value or that of a subsidiary. Investing is fundamental in any business decision-making process, but strategic decisions need more work and consideration. In this post we will cover some of the most common types of strategic investments, as well as their upsides and downsides.
A corporation can choose to invest in specific companies or assets; buy part or all of another firm; or partner with other organizations. Such investments may be made for financial reasons (e.g., buying bonds) or because they allow the company to grow strategically (e.g., acquiring a competitor). Strategic investments are also sometimes made to enhance the efficiency of the business, or to reduce costs, or they can be part of a merger and acquisition activity. Examples of common strategic investments include technology companies partnering with other companies in order to achieve economies of scale, pharmaceutical firms entering into exclusive licensing agreements with other organizations for the production of new drugs, and so on.
Worldwide Strategic Investment Market
The global strategic investment market is characterized by high profitability and low capital intensity, which attracts both private equity firms and multinational companies. In the recent past, a large number of mergers and acquisitions have been observed in the strategic investment market. The growing demand for strategic investments from corporations is also expected to fuel the growth of the global strategic investment market over the forecast period. Strategic investments are generally classified as either primary or secondary investments.
Primary strategic investments are those that a company makes in a firm with a view to acquire it completely or partly. A company may want to make primary strategic investments so as to capitalize on its partner’s intellectual assets, brand value, technology, etc., and grow by leveraging its partner’s strengths. However, buying out another firm must be done in an intelligent manner in view of its effect on the company’s existing operations and strategic plan. Primary strategic investments are the most common but they do not always yield high returns. On the other hand, secondary strategic investments provide higher returns than primary investments.
Secondary Strategic Investments are part of a wider set of investment activities that can include share repurchases, acquisitions of outstanding shares, etc. For instance, a company can make secondary strategic investments by acquiring shares in another company to gain control over it or to buy out its minority shareholders. Secondary strategic investments are generally more profitable than primary strategic investments. These investments are also associated with higher risks compared to primary strategic investments; that is why companies often consider making secondary strategic investment after carrying out thorough due diligence exercise.
In the past few years, conventional wisdom has shifted towards lower-risk investments that offer higher returns. However, as Fintalent experts have proven time and time again, conventional wisdom is often wrong. Fintalent’s Freelance Strategic Advisory Consultants would analyze a firm’s business operations, and suggest the most viable strategic investment option while stressing the importance of taking risks for better returns without putting the finances at risk.