Growth by Acquisition 2022
What is an Acquisition?
An acquisition is defined as a corporate transaction where one company purchases a portion or all of another company’s shares or assets. Acquisitions are typically made to take control of, and build on, the target company’s strengths and capture synergies.
There are multiple types of business combinations:
- Acquisitions: Both companies survive.
- Mergers: One company survives.
- Amalgamations: Neither company survives.
The acquiring company buys the shares or the assets of the target company, which gives the acquiring company the power to make decisions concerning the acquired assets without needing the approval of shareholders from the target company.
Growth via acquisition can allow a buyer to acquire skills (people skills or research and development capabilities) or innovative technology more quickly and at a lower cost than if this were to be developed in-house. Essentially, an acquisition in this context can solve critical time-to-market issues.
Acquisition vs. Merger
Mergers and Acquisitions (M&A) are similar transactions; however, they are significantly different legal constructs:
- Acquisition: Both companies continue to exist as separate legal entities. One of the companies becomes the parent company of the other.
- Merger: Both entities combine, and only one survives while the other ceases to exist.
- Amalgamation: Neither legal entity survives. Instead, an entirely new company is created.
Benefits of Acquisitions
Acquisitions offer the following advantages for the acquiring party:
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Reduced Entry Barriers
With M&A, a company can enter new markets and product lines instantly with a brand that is already recognized, with a good reputation and an existing client base. This helps overcome market entry barriers that were previously challenging. -
Market Power
Acquisitions can help increase market share quickly. While competition can be challenging, growth through acquisition helps achieve market synergies. -
New Competencies and Resources
Acquiring other businesses allows companies to gain new competencies and resources, providing benefits such as rapid revenue growth or improved financial stability, making capital raising easier. -
Access to Experts
Acquisitions allow small businesses to access specialists, such as financial, legal, or human resource professionals, through larger partners. -
Access to Capital
Post-acquisition, access to capital as a larger company improves significantly. Smaller businesses, often forced to rely on personal funding, can now leverage larger loan funds. -
Fresh Ideas and Perspectives
M&A brings together a team of experts with fresh perspectives, ideas, and innovative approaches to achieving business goals.
Challenges with Acquisitions
While M&A can be an effective way to grow your business, it may also create challenges. These potential pitfalls should be considered before pursuing an acquisition:
- Conflicting Cultures: Different corporate cultures may create integration challenges, leading to anxiety and antagonism among employees.
- Duplication: Employees may duplicate roles, leading to redundancies and job cuts, which can lower morale and productivity.
- Conflicting Objectives: Distinct goals between the acquiring and acquired companies may create resistance and undermine efforts.
- Poorly Matched Businesses: A lack of expert advice may lead to acquiring a business that creates more problems than benefits.
- Pressure on Suppliers: Suppliers may be unable to meet increased demand post-acquisition, leading to production issues.
- Brand Damage: M&A may damage the existing brand or create confusion about whether brands should remain distinct or merge.
Key Takeaways
When you see a downturn in innovative ideas, it could be a sign that your staff is too busy trying to keep up with the frantic pace to be creative. If creativity has dried up, it’s time to develop a better support system for your growth.
An acquisition is a powerful way for a company to achieve rapid growth in a brief period. Companies pursue M&A to improve market share, achieve synergies, and gain control of assets. It is less expensive, less risky, and faster than traditional growth methods, such as sales and marketing efforts.
While acquisitions can create substantial and rapid growth for a company, they may also cause challenges, such as cultural clashes, mismatched synergies, or conflicting objectives. It is essential to analyze both the advantages and disadvantages before proceeding with an acquisition.
A well-executed strategic acquisition that leverages synergies can be one of the best ways for a company to achieve sustainable growth.