In this article I want to give you some insights in the reasoning why buyers make acquisitions. Acquisitions can have an offensive, mainly growth related, nature or on the contrary have a defensive nature. Defensive moves can be especially of importance with larger acquisitions in markets with only a limited number of players. Sometimes a buyer must just prevent that a competitor leaves the stage with a desired acquisition. This is an example of a defensive move. The reasons for acquisitions can also be classified into strategic, operational, financial or managerial.
I am very interested to hear your thoughts and opinion are on the rationale behind acquisitions. What do you see as major reasons for acquisitions?
Here an overview of the reasons for acquisitions that we come across in our daily M&A business:
- Grow into new markets
- Provide new services or products
- Sell into new industries
- Decrease business risk
- Acquire new technologies or skills
- Realize financial synergies
- Realize economies of scale
- Cost synergies
- Eliminate competition
- Managerial reasons
- Other reasons (eg tax benefits)
I am very much interested in your opinion and the experiences you encounter in the area of acquisitions. What do you see ? What is crucial in your opinion regarding doing a good acquisition? Please reply and give your opinion below the article.
Grow into new markets
The main reason we see for acquisitions across many transactions is to grow into new markets. Herewith I refer to new countries. Companies start out of their home country. Once they become bigger and have developed a strong market position domestically they start looking abroad for further business. In Europe this means they start looking for organic growth or acquisitions in a neighbouring country where they are familiar with. Given there are many countries in Europe this is a strategy that can be executed for some time.
Provide new services or products
By acquiring a company a buyer can get access to new services or products. These acquired services or products of the target company can be sold to a buyer’s own clients. Also the other way around: the products of the own company can be used to increase the sales to clients of the target company. In this way synergies can be realized in the sales of both companies. This will help to make 1+1=3 and have the buyer benefit from positive synergies in an acquisition.
Sell into new industries
If a buyer is strong in a specific industry and wants to grow it’s position it can acquire a target that provides similar services in another industry. Especially if the products or services of the two companies are reasonably similar this can be a good strategy to grow market share. Industries that have a similar nature are most suited for this type of acquisition. In practice one has to investigate together with the acquirer which industry would be ideal for an acquisition.
Decrease business risk
This reason for acquisitions has a defensive background. A company wants to limit it’s business risk by spreading it’s activity over more regions or industries. There is some overlap with the other reasons for acquisitions described here. The geographic risk can be spread by being active in various regions that preferably are not too much related in economic performance. If one country or region (eg Europe) is performing bad another one (like the fast growing Asian or African economies) can be doing well. This decreases the overall business risk for the buying company.
Acquire new technologies or skills
Access to new technologies or skills is an important reason for companies to acquire a target. Especially in the case where an established company lacks knowledge of these new technologies. This can be especially relevant in online businesses. We have seen many cases where leading companies had not focused on new online technologies. At the stage when they realized that they had missed the boat it was too late to build something similar their selves. The only opportunity left then is to acquire a company that is leading in that specific area of technology.
Realize financial synergies
Acquisitions often happen for a financial reason. The buyer can have the intention to acquire a company to get access to new and cheaper funds. There are situations where the acquiring company has a high financial leverage with a lot of debt. Buying a financial healthy company can improve the access to additional external debt financing. Hence one of the motives of a company to undertake an acquisition can be to get access to a company which has a healthy liquidity position with low or non-existent financial debt.
Realize economies of scale
Via an acquisition economies of scale can be realised. A larger combined firm can benefit from various economies of scale. These can be located in the area of purchasing (larger volumes), more bargaining power, more efficient use of employees or assets and many others. In the next paragraph further details are given on the realization of cost synergies (these also occur via economies of scale).
Realizing cost synergies is such an important reason for acquisitions that I mention it separately here. The previous items had some lines related to cost synergies in it already. The argument for costs savings is always very compelling and hence I make it separately here. When two companies have similar products or services the combination can create a large opportunity to reduce costs. When companies merge they mostly have an opportunity to reduce operating costs by integrating and streamlining support functions.
Many M&A deals are also done to eliminate competition. If you are the number two or three in the market and you acquire a player of a similar size, your power in the market will increase. To eliminate a direct competitor is quite often a reason for an acquisition. This can be the case on a national but also on a regional level. A premium is often required to convince the target company as they will also know that their strategic position will be of a large benefit for the buyer.
Buying a similar company that can be managed by the management team of the buyer can be an important reason for an acquisition. This can be, especially, the case for smaller companies. If you can take away the management of a small company and add the operational business into your own structure this can be an important cost saving. As a result profitability can increase significantly. We see this often happen these days in ICT with cloud related companies. Less advanced business owners that are still executing a business model with a lot of manual work can be easily taken out. After this the acquired company can be integrated in an efficient, well structured cloud based model with much higher revenue per employee.Under this item the acquisition of new talented management can also be placed. A company can be acquired because it has especially gifted management. A buyer wants to get access to the management of the acquired company. If it is not possible to engage them directly into a management position of the buyer a different way is to buy their company to get access to this talented management.
Quite some other reasons exist that can’t be placed easily into one bucket. One reason can be tax advantages. If a company has tax losses carried forward a profitable buyer could benefit from this. Many other reasons for acquisitions exist that we see happening in the markets. Sometimes it can go to an extent that a CEO just wants to buy a certain company for a personal reason.Please provide your feedback and opinion on this topic.What do you see as valid reasons for acquisitions?Which reasons for an acquisition do you point out, as an advisor, to a buyer if you help this company in selecting possible targets?
Mehmet Sa??ro?lu | Monday 29 December 2014 | website:
Very crucial reasons for any buyer to digest well before entering to an M &A deal As A banker the most difficult part of the transaction is to convince the buyer the right reasons of the buy or merge
Thank you , good article.....