Acquisitions help in growth and expansion. The world’s most successful companies reveal that in general, they rely heavily on acquisitions to achieve their strategic goals. Despite the challenges, their managers believe that acquisitions are faster, cheaper, and less risky than organic expansion.
In acquisition one company purchases full control of another company. After the acquisition, the company being purchased will dissolve and cease to exist. The new owner of the company will absorb all of the acquired company’s assets and liabilities.
There are two types of acquisitions, in one the company acquiring another company. On the other, a private equity firm acquiring a company.
The first type of acquisition is very common. A company is deciding whether to acquire with another company. For example, Walmart is a large retail corporation that runs a chain of supermarkets, department stores, and grocery stores. They are planning to acquire a company that provides an online platform for small businesses to sell their products.
There are many reasons a company would want to acquire another company. In making an acquisition, a company may be trying to:
- To win other company’s customers
- Gain intellectual property, propriety technology, or other assets
- Take over other company’s distribution channels
- Acquire talent
- Realize cost synergies
- Increase sources of revenue
- Remove a competitor from the market
For example, a private equity firm is considering acquiring a national chain of tattoo parlors.
The private equity firm would go for acquisition to improve the company’s operations and drive growth. After several years, the firm will look to sell the acquired company for a higher price than what it was originally purchased for.
A private equity firm would acquire a company to diversify its portfolio of companies to reduce risk and to generate a high return on investment. It would like to realize synergies with other companies that the firm owns.
The company should consider business synergies for acquiring another company. It should understand what the specific goal or target is. It must use numbers to quantify the metric for success. For example, if a company wants a high return of investment what ROI are they targeting? If a company wants to realize revenue synergies, how much of a revenue increase are they expecting? Well, some goals or targets may not be quantifiable. For example, if the company wants to increase its revenue sources, this is not easily quantifiable. Private equity firms generate a high return on investment by acquiring
companies through investor money.
The following is the acquisition framework:
Company attractiveness is a factor which reveals that whether the acquisition target an attractive company. To know these following points should be considered:
- Company’s growth trajectory
- Company’s profitability
- Company’s competitive advantages
Market attractiveness is considered to assess that the market that the acquisition target plays is attractive.
The following factors need to be considered when assessing the market attractiveness:
- Market growth rate
- Market size
- Average profit margins in the market
- Substitutes availability and strength
- Assess supplier power
- Assess buyers power
- Know barriers entry
The crucial cost synergies can be realized. The financial implications such as expected financial gains or return on investment from this acquisition.
During acquisition the significant cost of synergies should be realized:
The synergies are of two types:
- Revenue synergies like accessing new distribution channels, accessing new customer segments, cross-selling products, and bundling products together.
- Cost synergies help the company reduce overall costs. Examples of cost synergies include consolidating redundant costs and having increased buyer power.
The acquisitions are a part of the client’s growth strategy. The client may be looking to grow revenues or looking to grow profits. Or they are in the way of a growing number of locations.
A strategic acquisition is often about gaining credibility, adding intellectual firepower, or changing the balance of power in a particular market.
Acquisitions make perfect sense in a variety of situations. For example, an opportunity that presents itself requires fast, decisive action or maybe a competitive threat compels a defensive move to get bigger, faster.
Many industries are facing a lack of experienced, professional staff. Cybersecurity, accounting, and engineering are important professional fields. The reality is intellectual property is the new currency of modern business. IP is now actively bought and sold. For many companies, the acquisition of a firm and its IP is the quickest path to market dominance.
Acquisitions add a new business model. It may help you save considerable time and expense in your growth strategy.
Let us explain the acquisition with an example Firm A highly respected accounting firm that specializes in manufacturing acquires Firm B, a cybersecurity firm with specializes in helping retailers. The acquisition seems very lucrative. Seeing an opportunity, the combined firm, A+B Associates, tries to add retail to their specialization. The result is a confusing marketplace.
Let’s say Firm A, a highly respected accounting firm that specializes in manufacturing, acquires Firm B, a cybersecurity firm with specializes in helping retailers. The acquisition seems very strategic. Seeing an opportunity, the combined firm, A+B Associates, tries to add retail to their specialization. The result is a confusing marketplace.
Does A+B still specialize in manufacturing? Are they no longer an accounting firm? The confusion can be worse if the rationale for the acquisition is growth for growth’s sake. The whole confusing mess could be avoided with a solid, research-based plan to position the acquired brand and help current and potential customers understand the rationale and benefits of the acquisition.
If the marketplace is confused, the strength of the brand will suffer. For example, brand M which has considerable visibility in the Midwest wants to expand into the southeast. To accomplish this, brand M acquires Brand S, a southeastern-based firm. But there is a problem. The Midwestern brand is unknown in the southeast, so its overall brand strength is diminished by the acquisition. And, when the southeast firm adopts the brand identity of Brand M, its brand strength is also diminished. Everybody loses.
Acquisitions have become a popular business strategy for companies looking to expand new markets or acquire new technologies and skillsets. They are professional services space in the changing economy and marketplace. Infocrest a global firm always takes into account the synergies in business for acquisitions. It offers such services which are very much adaptable to the present scenario.Infocrest a global firm always takes into account the synergies in business for acquisitions. It offers such services which are very much adaptable to the present scenario.