Reasons for Acquisitions
new products internally. This is because the potential outcomes of an acquisition can be
1. INCREASE MARKET POWER
> In simple terms, companies often acquire other businesses to gain more control and
influence in the market. Market power means a company can sell its products at higher
prices or operate with lower costs compared to its competitors. This power usually
comes from the company's size, resources, capabilities, and its share of the market. For
example, a large retail chain may acquire a smaller competitor to increase its market
power. By doing so, the retail chain can negotiate better deals with suppliers, offer
competitive prices to customers, and dominate the market in certain regions. This
increased market power allows the company to have a stronger position in the industry
and potentially earn higher profits.
MARKET POWER
> In simple terms, market power refers to a company's ability to impact the market by
setting prices higher than its competitors or by operating with lower costs. When a
company has significant market power, it can dominate the market, control prices, and
potentially reduce competition. For example, a large tech company that produces
smartphones may have significant market power if it can sell its phones at higher prices
than other brands because of its strong brand reputation and customer loyalty. This
allows the company to control prices in the market and limit the competition's ability to
attract customers with lower-priced alternatives.
HORIZONTAL ACQUISITION
In simple terms, a horizontal acquisition happens when a company buys another
company that is in the same industry. This type of acquisition helps the buying company
become stronger in the market by combining their costs and revenues with the acquired
company. Research shows that horizontal acquisitions work better when the companies
involved have similar characteristics. An example of a horizontal acquisition is when a
smartphone company purchases another smartphone company that makes similar
products. By acquiring the competitor, the acquiring company can expand its market
presence and potentially improve its overall performance through shared resources and
increased market power.
• VERTICAL ACQUISITION
In simple terms, a vertical acquisition occurs when a company buys a supplier or
distributor of its products or services. This type of acquisition allows the company to
control more steps in the production or distribution process, making it vertically
integrated. For example, a car manufacturer acquiring a tire company would be a
vertical acquisition because it involves the manufacturer buying a supplier that provides
a crucial component for its cars. By owning the tire company, the car manufacturer can
ensure a stable supply of tires and have more control over the production process.
RELATED ACQUISITION
In simple terms, a related acquisition happens when a company buys another company
in a closely related industry. These acquisitions can be challenging to evaluate because it
is hard to achieve the expected benefits from combining the two companies. For
example, a sports apparel company acquiring a fitness equipment manufacturer would
be a related acquisition because both companies operate in the health and fitness
industry. Despite the similarities, it can be challenging to determine the exact value and
potential synergies of such a deal due to the different aspects of their businesses.
2. OVERCOMING ENTRY BARRIERS
> In simple terms, when a new company faces challenges entering a market due to
factors like economies of scale and unique products, it may choose to buy an existing
company instead of starting from scratch. This strategy can be more effective as it gives
the new entrant immediate access to the market, especially when the barriers to entry
are high. For example, a tech startup wanting to enter the smartphone market may find
it difficult to compete with established companies due to high barriers like brand
recognition and production costs. Instead of starting its own brand, the startup could
acquire an existing smartphone company to quickly establish a presence in the market
and overcome these barriers.
BARRIERS TO ENTRY
> In simple terms, barriers to entry are obstacles in a market that make it more
expensive and challenging for new businesses to enter and compete. These barriers can
be related to the market itself or the existing companies operating in it, creating
difficulties for new ventures trying to establish themselves. For example, high start-up
costs, strict regulations, strong brand loyalty of existing companies' customers, and the
need for specialized technology or expertise can all act as barriers to entry. These
obstacles can deter new businesses from entering the market and limit competition,
allowing established companies to maintain their market dominance.
• CROSS-BORDER ACQUISITION
> In simple terms, cross-border acquisitions occur when companies from different
countries buy each other. These acquisitions help companies overcome barriers to
entering foreign markets. Unlike cross-border alliances where companies cooperate,
cross-border acquisitions give a company more control over its international operations.
For example, a German automobile manufacturer buying a Japanese car company is a
cross-border acquisition. By acquiring the Japanese company, the German manufacturer
gains access to the Japanese market, overcomes language and cultural barriers, and can
control the operations of the acquired company to expand its global presence.
COST OF NEW PRODUCT DEVELOPMENT AND INCREASED SPEED TO MARKET
> In simple terms, creating and launching new products within a company can be costly
and time-consuming. It is challenging to make a quick profit because a lot of resources,
such as money and time, need to be invested in the development process. For example,
a technology company that wants to develop a new smartphone may need to invest a
lot of money in research, design, manufacturing, and marketing before the product is
ready to be sold. This process can take time, and the company may not see immediate
profits until the new smartphone gains popularity in the market.
LOWER RISK COMPARED TO DEVELOPING NEW PRODUCTS
In simple terms, acquiring another company is often seen as less risky than developing
predicted more accurately compared to the uncertain results of creating new products
from scratch. Managers prefer acquisitions as they perceive them to be less risky. For
example, a software company considering expanding its services may choose to acquire
a smaller software startup instead of developing a new product internally. By acquiring
the startup, the company can assess its existing products, customer base, and financial
performance, making it easier to estimate the potential benefits and risks of the
acquisition compared to the uncertainties involved in developing a completely new
product.
INCREASED DIVERSIFICATION
In simple terms, companies use acquisitions to diversify their business operations.
Through acquisitions, companies can quickly expand into new markets or introduce new
products. It is often easier for companies to enter markets they are already familiar with
rather than starting from scratch. Acquisitions provide a fast and straightforward way
for companies to change their mix of businesses. For example, a food and beverage
company that specializes in snacks may acquire a beverage company to diversify its
product offerings. By acquiring the beverage company, the snacks company can enter a
new market segment and offer a broader range of products to its customers. This
diversification helps the company reduce risks associated with relying solely on one type
of product.
RESHAPING THE FIRM’S COMPETITIVE SCOPE
In simple terms, companies sometimes use acquisitions to change their competitive
position and reduce the impact of strong competition on their financial performance. By
acquiring other businesses, companies can decrease their reliance on specific products
or markets, which helps them broaden their competitive reach. For example, a
telecommunications company facing intense competition in the mobile phone market
may acquire a digital services company to diversify its offerings. By expanding into
digital services, the telecommunications company reduces its dependence on just selling
mobile phones and enters a new market segment. This shift in focus helps the company
reshape its competitive scope and reduce vulnerability to fluctuations in the mobile
phone market.
RESTRUCTURING
In simple terms, restructuring is a strategy that involves a company making changes to
its business operations or financial setup. It is a common practice worldwide. When an
acquisition strategy does not work out as planned, companies often resort to
restructuring to address the issues that led to the failure of the acquisition. For example,
if a retail company acquires a chain of stores but faces challenges integrating them into
its existing business, resulting in financial losses, the company may opt for restructuring.
This restructuring could involve selling off underperforming stores, streamlining
operations, or reorganizing its management structure to improve efficiency and
profitability.
DOWNSIZING
In simple terms, downsizing refers to a company reducing the number of its employees
and, sometimes, its operating units. This action does not necessarily involve changing
the types of businesses the company is involved in. For example, a manufacturing
company facing financial difficulties may decide to downsize by laying off a portion of its
workforce and closing some of its less profitable production facilities. This downsizing
helps the company cut costs and improve efficiency without altering the core businesses
it operates in.
DOWNSCOPING
In simple terms, downscoping involves a company getting rid of businesses that are not
related to its main operations. This can be done through selling off those businesses,
creating separate companies, or using other methods to eliminate them. Downscoping
is a strategic move that helps a company concentrate on its core operations.For
example, a technology company that initially diversified into the food industry by
acquiring a restaurant chain may decide to downscope by selling off the restaurant
business. By doing this, the technology company can refocus its efforts and resources on
its core technology products and services, streamlining its operations and improving its
overall performance.
LEVERAGED BUYOUT
In simple terms, a leveraged buyout (LBO) is a strategy where a party purchases all the
assets of a company to make it a private entity. Private equity firms are companies that
help make this happen by buying public companies or specific business units and turning
them into private businesses. For example, a private equity firm may acquire a publicly
traded retail chain by purchasing all its shares and taking the company private. By doing
this, the private equity firm gains full control over the retail chain's operations and can
make strategic decisions without the scrutiny of public shareholders.