2.0.6- PRODUCT LINE EXTENSION

PRODUCT LINE EXTENSION

As this implies, this type of acquisition will provide your company with new products or services to sell. Advantages include the following:

• You avoid the need for R&D investment (time, money, and personnel).
• Your broader product line might attract new customers looking for a complete solution.
• Sales of new products to existing customer base help boost overall growth rate.
• You eliminate a potential competitor (depending, of course, on the degree of similarity among the existing and new product lines).

Disadvantages include the following:

• It could be difficult to cross-sell new lines of products. For example, your existing sales force may not have the necessary skills to sell the product effectively. Or your current customer base may not be interested in the new products.
• The acquired company's products could be shoddier than you thought, and you could face serious customer-support problems. (In many cases, it's more effective to start with a joint venture or a strategic alliance to sell new products. This is discussed in more detail in chapter 10.). 

Example: Through both internal development and acquisitions (10 since 1985), Macromedia has built an impressive product line of Web tools. One of its products, Flash, is a standard for Web animation. (Flash was the result of the December 1996 acquisition of Future Wave). Macromedia's principal strength was in developing Web tools that make sites look professional and even, well, snazzy. But it lacked tools for enabling high-end performance, such as e-commerce. Meanwhile, a company called Allaire specialized in such types of products, like ColdFusion, Spectra, Homesite, and JRun. When Allaire went public in September 1999, it raised $52.3 million. By one year later, though, it was suffering growing pains, and its depressed stock price reflected that.

Macromedia -- which already had a strong relationship with Allaire, integrating their products -- decided to take advantage of the company's reduced valuation. In January 2001, Macromedia agreed to purchase the company for $360 million.