In this blog post, S K Jha, a Graduate Engineer working as the Chief Manager of Retail Sales in Indian Oil Corporation and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes the advantages and disadvantages of strategic investment. 

The article is designed to provide the readers with the realistic understanding of strategic investment, its need and some of the advantages and disadvantages of strategic investment.

What is Strategic Investment?

A strategic investment is a transaction which is closely related to joint ventures. In strategic investment, one company makes an investment in another company. These two companies enter into an agreement to serve shared goals.

The term strategic investment applies to two different ways of investment in the financial world. The first is when an individual or a company invests with the goal of generating safe, steady returns usually with the advice of consultant company which is fully conversant of the trends in the market and addresses the needs of the customer.

In the second situation, it applies to a company’s decision to invest in another small company, usually a start up, with long term strategy in mind rather than simple profit.

Why is strategic investment needed?

Raising capital/investment is an important modern tool to start or expand the business/company. This is required to expand the business, to stay competitive in terms of technology, quality of product & to cope up customer’s need & market requirement.

Strategic Investment by an individual or by a Company is mainly with the objective of generating safe and steady return & acquire a significant position in the business world. This is normally done with the advice of an expert who is well conversant with the Market conditions and keeps the client requirement in mind. Investment can be by way of putting capital in the Company, Share acquisition, merger and joint ventures. Volume based companies often have the opportunity to accept an investment from a strategic investor.

Strategic investment decision making involves the process of identifying, evaluating and selecting among projects that are likely to have a significant impact on the organization. In a highly competitive environment, internationalisation is a very attractive strategic investment for all types of firms. However, making the decision on internationalisation, like other strategic investment, is very difficult because of high uncertainties and associated risk factors involved in it.

Strategic buyers are operating companies that are often competitors, suppliers, or customers of the firm in which they want to invest. Their goal is to identify companies whose products or services can synergistically integrate with their existing product line  to create incremental, long-term shareholder value.

Advantages:

• confirm the market that the company is good and has got the strength to compete in the market.
• An investment by a successful & well-known player of Industry is a barometer to
• It is a success story for many big companies in the country & around the world.
• It gives the opportunity to the investor to bring expertise, tie-ups, market share, etc. which in turn gives significant advantages to the company.
• The strategic investment gives the opportunity to the investor to take control of management.
• Strategic investment is not limited to financial investment as here the investor looks for much more & it is a long term vision and goal.
• The company can expand the business with the network of the investor as well as with the available resource of the original company. Therefore, it is a win-win situation for both the company. 
• There is no difficulty in obtaining fresh license / approvals, and the market is already established for the product.
• The brand is acquired instantly & readymade.
• It is a mechanism to determine & develop ownership or economic growth in the current marketing perspective.
• It helps the investor to get established market, skill manpower at disposal and one can instantly get the platform of established technology, clients and vendors.
• It also helps the original company to increase its value in the case listed in Stock Market.
• It reduces the risk and gives an opportunity for diversification of fund for maximising return for the Investing Company.
• Only with investment, the investing company can earn profit instead of developing the business infrastructure and thereby saving the cost associated with it.
• It also helps the individual or startup Company to acquire fund for the purpose of expansion of business and profit.
• For the investing company, an investment is usually made in exchange for a share of control over the company. This allows the company to protect its investment and to shape the direction of the smaller company’s business and product line.
• The strategic investment gives the investing company access to resources at a fairly low cost. For example, when the targeted company’s business is to develop technology, which the investing company finds useful, the later can make a strategic investment in the former company instead of developing its own technology to a great extent.
• A strategic investor gives freedom to a company to expand & accelerate its business through the investor’s distribution network, sales & marketing infrastructure.
• A strategic investor is normally not interested in taking over the control & micromanage it’s investment. However, its goal is certainly to benefit its own business or its product development plans.

Disadvantages:

• Strategic investors tend to be large, bureaucratic organisations & hence investment process takes longer time.
• It is observed that element of responsibility and co-ordination between the strategic investor and original company is not clearly defined which at times prove to be detrimental in the interest of the company.
• The interest of investor may diverge from the company interest leading to investors diminished support for the company.
• There may be a dispute between the two companies which can be detrimental for both.
• If the smaller company fails to keep up to its agreement with the investor company due to any reason, there is always a threat of investment being pulled out.
• The investing company may express a desire to take over the smaller company at some point in time in future, once the smaller company has proved itself as viable and profitable.
• The process of identification and evaluating the investment option is not simple, and it may go wrong thereby failure of entire estimation/calculation.
• There may be tax and Legal implication if not dealt clearly and with the proper agreement.
• Investment can prove to be a bad decision if due diligence is not done properly & the inputs are not examined critically.
• It involves various factors i.e. financial, legal, and environmental & anywhere going wrong may prove to a costly affair later on or situation may even go out of hand.
• Local conditions & factors may not be known to the incoming company & proper disclosures may not be there.
• There is an element of risk that valuable, vital information’s pertaining to business has diverged which can cause loss to the business.
• The interest of strategic investor may diverge from the company’s interest which could lead to the investor’s diminished support for the company.
• A strategic investor often invests in multiple companies in the same industry, and it may so happen that some of such companies are a competitor to each other. This leads to the risk of disclosure of company’s trade secrets and other sensitive information to the competitor.
• A strategic investor almost invariably wants some concessions from the company in connection with the investment and on favourable terms. Such concessions may include an exclusive or semi-exclusive license, distribution or marketing rights or certain other agreement which benefits the investor.
• The role & responsibility of the two companies , employee’s  involvement & their future is not addressed properly & remains a cause of concern for years together.

Accepting an investment from a strategic investor can have significant positive and negative impact on a company’s future & therefore the decision must be made carefully.

There is another model of investment which is known as financial investment. This also can be helpful while taking a call to meet funding requirement for expansion or diversification of the business. The main difference between the two model of investment is briefly underlined below.

Difference between A Financial and A Strategic Investor

Financial buyers are those investors who have core competencies to execute a deal and they are in the business of making an acquisition. Financial buyers can generally be classified as investors interested in the return they can achieve by buying a business.

Strategic buyers are interested in a company’s fit into their own long-term business plans. Strategic investors are not having dedicated M & A team, and decision is normally supported by consultant report & discussions amongst Board level Executives.

Due diligence takes time for a strategic investment whereas decision is fast for a financial buyer. Financial investors are primarily looking for exit over a very short investment horizon whereas strategic investor does not have such exit plan for short term

The strategic investment decision-making process is one of the greatest challenges for the top management. There is a critical need to get these decisions right. On the one hand, if the decision proves successful, the firm reaps major strategic and operational advantage. On the other hand, important opportunity and substantial resources are lost if the decision is wrong.