4 reasons to acquire a business
Most companies follow a standard life cycle that takes them from introduction to the market at the company’s inception, through a growth period before they reach maturity. This point typically signals the start of a decline. For most businesses, their average growth rate tops out at around 15 percent. If a market is going through a growth period, perhaps this will accelerate. But it times of decline, businesses must look to take market share from a competitor to retain anything like this level of growth. For businesses looking to stave off their decline phase or maximize their period of growth, acquisition is an essential tool.
Why target acquisition?
Companies turn to acquisitions to push for company growth beyond their niche. But there are several reasons a business may plan acquisition into their strategy. It’s about identifying what the business needs to grow and the best way to achieve this.
1. New markets
For a business looking to enter a new product market or sell in a new geographical location, acquisition is a quick strategy to achieve this. With a new business on board, the purchasing company acquires instant market share, existing customers and infrastructure.
Between 2010 and 2013, IBM acquired 43 companies intending to use IBM’s global sales force to sell their products. With their existing infrastructure and market access combined with these new products, they were able to accelerate the revenues of the acquired companies by 40 percent in the first two years.
Two businesses on a more level playing field can still benefit hugely from a strategic acquisition. Proctor and Gamble and Gilette each had strengths in different markets. Following the acquisition, their new products were successful in new markets more quickly with the support of the other brand.
2. New technology
When a new technology or niche product reaches the market, it can be quicker and cheaper to acquire a company that is already offering the product in question rather than develop a rival version.
Apple has a famous acquisition strategy that has seen them take on some of the more cutting-edge technology on the market. In 2010 the company acquired Siri rather than develop the automated personal assistant technology for themselves.
3. Increase output and efficiency
Some merger and acquisition activity aims to achieve cost savings as a result of economies of scale. When two companies that possess similar logistics combine, the result is a more streamlined, productive and efficient business model.
When alphabroder, a maker of branded apparel, acquired Prime Line, a maker of branded hard products such as pens and notepads, efficiency was one of the benefits they had in mind. The acquirer was able to offer a more comprehensive range of branded items to their customers, whilst streamlining the order and delivery process.
4. Remove competition
The final reason behind acquisitions is to remove the competition. If a target company is perceived to be a threat, acquiring them will give a competitive edge, increase market value and market share. For example, when Kraft acquired Cadbury’s, they wiped out a significant competitor and gained the ability to move into new markets and new product categories.
