Why pursue acquisitions?
A strategic move for growth and innovation
In the dynamic world of business, companies are constantly seeking ways to grow, innovate, and stay ahead of the competition. One of the most effective strategies to achieve these objectives is through acquisitions.
But what drives companies to pursue the riskier path?
Below we delve into some of the key reasons behind this strategic decision.
Market expansion
One of the primary motivations for acquisitions is the desire to grow. By acquiring another company, businesses can quickly gain access to new geographical regions, customer bases, and market segments. This approach allows companies to bypass many of the challenges and risks associated with entering unfamiliar territories organically.
So why pursue inorganic growth over organic?
Speed. By buying companies, SMEs accelerate expansion that could otherwise take years. Acquisitions can therefore act as a shortcut… But, this shortcut is only worthwhile provided the targets are chosen wisely, the acquirer doesn’t over-pay, and the opportunity and synergies are fully understood. Such knowledge is usually obtained from appropriate due diligence which will be covered in future editions.
Diversification
Diversification is another crucial factor. Companies often seek to reduce their reliance on a single product line or market by acquiring businesses in adjacent industries or sectors. This not only spreads risk by reducing reliance on fewer customers/ products but also opens up new revenue streams, often involving cross-selling opportunities, enhancing overall financial stability.
If the business is performing well already, why diversify?
The companies that thrive in a competitive environment (any business environment), are those that are resilient to downturns. Diversification is important because it helps businesses mitigate risks associated with market fluctuations, changes in consumer demand, and economic downturns. By expanding investments and operations across various industry sectors, companies cushion themselves against potential losses in one area with gains in another. This strategic move not only enhances stability but also opens more avenues for growth and innovation, making the business more adaptable. Also, robust financials with low year-to-year volatility will be looked upon favourably by acquirers/ investors when the time comes to exit.
What about ‘Master of All, Master of None’?
Diversification doesn’t mean spreading operations across many products and sectors: a company should concentrate on those sectors where it has strengths, knowledge, and experience (competitive advantages), whilst spreading turnover over less than perfectly correlated service lines. A straightforward route is vertical integration, in which the acquisition target operates at a different stage within the company’s supply chain. Vertical integration offers significant advantages, including enhanced control over supply, cost savings, improved product quality, and a strengthened competitive position. However, as with all transactions, additional operational complexities may be introduced. Organisations considering vertical integration should carefully evaluate whether they possess the necessary resources and expertise to effectively manage the broader scope of operations.
Access to new technology
In today’s tech-driven world, staying at the forefront of innovation is essential. Acquisitions can provide companies with access to proven cutting-edge technologies and expertise that might take years to develop internally. By integrating these new capabilities, businesses can accelerate their innovation cycles and maintain a competitive edge.
Why does leveraging technology increase value?
Leveraging technology increases value by synergistically streamlining processes, reducing costs, and optimising product offerings. Advanced technologies can automate routine tasks, freeing up employees to focus on more strategic, value-added activities. They can also provide better data analytics and insights, leading to more informed decision-making. Additionally, innovative technologies can fuel the development of new products and services, opening more revenue streams and strengthening the company’s competitive position.
In terms of acquisitions, technology also enables companies to easily transfer processes and systems across targets, introducing cooperation among formerly separate operations.
Cost efficiency
Economies of scale play a significant role in the decision to pursue acquisitions. By merging with or acquiring another company, businesses can achieve greater operational efficiencies, reduce costs, and increase profit margins. This is often realised through the consolidation of resources, elimination of redundancies, and greater bargaining power with suppliers and customers.
What are the common efficiencies?
The common cost efficiencies realised from acquisitions include:
- Resource consolidation: By combining resources, such as production facilities, logistics networks, and administrative functions, companies can streamline operations and reduce costs.
- Increased bargaining power: A larger, unified company often has greater negotiating power with suppliers, leading to lower input costs and more favourable credit terms.
- Operational streamlining: Standardising processes and systems across the newly merged entity can lead to improved efficiency and decreased operational costs.
- Economies of scale: Scaling up production and distribution can reduce the unit cost of goods or services, thus enhancing margins. A close relative: economies of scope, further enhances efficiency with the introduction of shared services such as HR, facilities maintenance, IT, etc.
- Shared technology and expertise: Leveraging the technological capabilities and specialised knowledge of the acquired company can lead to cost-saving innovations and improved productivity.
- Tax benefits: In some cases, acquisitions can provide tax advantages through the utilisation of tax losses or other tax mitigation strategies.
Talent acquisition
The acquisition of skilled talent is another compelling reason. In many cases, a significant value proposition for a company lies in its off-balance sheet assets, for which a key contributor is its workforce and their experience and expertise. By acquiring a firm with talented employees, companies can enhance their own human capital, foster innovation, and drive growth. The same motivations that arise for intangibles such as IP and patents, or tangible assets such as real estate and specialised equipment.
Why acquire rather than recruit?
Acquiring firms with skilled employees can provide immediate access to a pool of talent and expertise, saving costs on training and gaining teams which have proven abilities and market facing success. Cultural enrichment can also result, as diverse teams bring varied perspectives and ideas, fostering a more dynamic and creative work environment.
What other off-balance sheet assets can be gained from acquisitions?
Acquisitions can yield various benefits beyond the target’s balance sheet. Acquiring a company with a strong brand reputation, can enhance the acquiring organisation’s market standing and foster customer loyalty.
Additionally, acquisitions may provide access to intellectual property such as patents, serving to protect and strengthen product portfolios and offer a technological advantage. The transfer of customer relationships and contracts – critical intangible assets – supports business continuity and may facilitate entry into new markets or increase market share. Furthermore, leveraging the research and development expertise of an acquired firm can enrich innovation pipelines and expedite product development cycles.
Competitive advantage
Lastly, acquisitions can provide a strategic advantage over competitors. By acquiring a company with a strong market position, unique capabilities, or valuable assets, businesses can strengthen their competitive ‘moat’ and differentiate from rivals.
Why is differentiation important?
Differentiation is crucial in a competitive environment as it allows a company to stand out, offering distinctive products or services that meet specific addressable market needs. Unique drivers help to attract and retain loyal customers, gain pricing power, and create barriers to entry for potential competitors. By establishing a distinct identity in the marketplace, businesses can build brand recognition, leading to increased market share.
How about acquiring competitors?
Horizontal integration where businesses acquire companies within the same industry and often at the same stage of the production process, expedites market share gain, reduces competition, and contributes towards economies of scale. By consolidating with other players in the same market, companies can streamline operations, enhance efficiencies, and leverage synergies. This can lead to greater pricing power, enhanced product offerings, and an overall stronger market position.
Closing remarks
In conclusion, acquisitions are a powerful tool in a company’s strategic arsenal. Whether the goal is to expand market presence, diversify offerings, access new technologies, achieve cost efficiencies, acquire talent, or gain a competitive edge, inorganic growth offers numerous benefits.
It is important to remember however, that successful acquisitions require careful planning, evaluation, due diligence, disciplined execution and, perhaps most importantly, successful integration after the deal to realise their full potential. For the acquisition pursuit to be a good use of not only funds, but time, the transaction should be value accretive.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.