Acquisition strategies

An acquisition is defined as the purchase of a company’s shares by another company. An organization can buy another one with cash, stock, debt recovery, or assets. When a firm is purchasing more than 50% of the assets, the acquirer is allowed to make decisions without the approval of the other shareholders. So, by doing an acquisition, it doesn’t create a new organization as is the case for mergers. The terms “mergers” and “acquisitions are often used in the same way, but their meaning is different. Indeed, a merger is when two companies are combining into a new entity. In both cases, mergers and acquisitions directly impact the company’s culture, ownership, and way of doing things. The business term “acquisition strategy” is a method used by companies to purchase other firms in order to be more profitable. It refers to the concept of synergy which suggests that companies are better combined and more valuable than separate.

Benefits and drawbacks

There isn’t a good way to make acquisitions successful because each company has its strategic logic. It depends on the size of the enterprise or for instance its main goal. However, the strategy should not be a vague concept like growth, but it should be something more specific and the acquirer has to be sure the acquisition will generate value.

In general, companies are willing to do an acquisition to improve their performance, strengthen their market position, and acquire skills, technologies, or human capital at a lower cost or more quickly. Furthermore, they can buy another company to enter a new business area (diversification) or a new foreign market and remove the competition from an industry. Most of the time benefits from acquisitions are about cost-cutting and economies of scale.

However, there can be some complications in the absorption process such as complaints, fear from employees about losing their jobs, or also a loss of motivation for some of them because they will have to learn new habits. In order to avoid those drawbacks, the choice of acquisition strategy is really important.

Strategies

There are four main types of acquisitions: vertical, horizontal, conglomerate, and congeneric. Most of the time they are friendly transactions, but they can also be unfriendly sometimes. If it is the case, the term “takeover” should be used because it suggests resistance from the target company. To force the acquisition, the acquiring company must buy more than 50% of the shares to take control of the target firm.

First of all, a vertical acquisition is when a firm buys an organization either upstream in its supply chain, like the key suppliers of the raw materials the firm needs for its products, or downstream like a retailer. By using this strategy, the company will have complete control over its supply chain.

On the other hand, there is the horizontal strategy based on buying a competitor in the same industry sector as the parent company and the same position in the supply chain. With this deal, the acquiring company can use competitive strengths and get new advantages.

Furthermore, we have the conglomerate strategy when the parent firm acquires an unrelated business either by products or by markets (different industries or sectors). The two entities have completely different localisations and different customers. By doing a conglomerate acquisition, the company can diversify its risks and try to enter a new market.

Moreover, we have a congeneric strategy which is about market expansion. It is when a company buys a firm that is in the same related industry but with other products.

Despite those strategies, most of the acquisitions aren’t as successful as expected because the purchase cost is very high and the internal and cultural integration is complicated. However, companies keep acquiring other firms to face the competition and remove threats.

Whereas the strategy is important, it is also crucial to evaluate whether the target firm is a good candidate or not. The acquiring company must be careful about the price, the debt load, conflicts with other companies, and the financial statements of the other organization. So, for instance, a good acquisition candidate does not have a lot of litigation and debts. Besides, it should have well-organized financial statements and a high price for the purchase should be avoided.

References

• Ghosh Ray, K. (2010). [[1]]. "Mergers and acquisitions: Strategy Valuation and Integration", 1-57..

Author: Emma CARTILLIER