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Reasons for Acquisitions

Corporate mergers and acquisitions can increase the firm’s competitive advantage, or end up as a fiasco. To acquire a company is an expensive proposition, and one must utilize this strategy for the right reasons.

There are 5 common reasons a firm should consider acquisitions part of its strategy:

  1. To increase market power. There is an advantage to being big. The firm can negotiate better deals with suppliers and buyers, expand its distribution and service networks, achieve economies of scale or scope, and even form political coalitions.

  2. To overcome entry barrier. In competitive corporate environments, there are often entry barriers into a market such as economies of scale, brand equity & reputation, product & technology patents, and exclusive buyer or supplier contracts. When firms are looking to expand internationally, there may be cultural challenges and regulatory restrictions that would induce an acquisition of or a joint venture with a local company.

  3. To increase time to market of a new product. Internal development of new products and processes is risky, because 88% of product R&D projects fail, and 60% of the successful ones get imitated within 4 years. Acquisition provides an increased time to market with more predictable returns.

  4. To learn and develop new capabilities. It can often be expensive or impossible to learn the core competency of a competitor. If you can’t beat them, buy them.

  5. To increase diversification. The acquisition of related businesses can generate synergy among the companies, and the acquisition of counter-cyclical businesses can reduce the risks associated with economic, technological, regulatory, or competitive shocks. For instance, service and manufacturing companies are counter-cyclical, so a manufacturing company acquiring a service division would even out its cash flow.

 

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