Companies buy companies to grow, but that doesn’t tell the whole story. In reality, there can be multiple reasons for an acquisition. Here’s a snapshot of some of the most common:
- Increase Top Line Revenue – The ultimate objective in any business is higher earnings, and to reach that goal you will eventually have to raise your revenues. Cost reduction has diminishing returns and organic growth has its limits, so acquiring a healthy, cash-flow company can lead you to positive earnings/holdings.
- Expand in a Declining Market – In a waning market, acquiring a bigger portion of it will allow you to maintain (or even increase) revenues while you wait for the market to rebound. And if it does not, you will at least own a larger slice of a smaller market.
- Reverse Slippage in Market Share – If your company is losing its share of an important market, making an acquisition could stop this slide – so long as you figure out why the slippage is occurring.
- Follow Your Customers – Your customers may be seeking products or services that you currently do not provide. Adding such products or services to your portfolio through acquisition gives them a “one-stop shop”.
- Leverage Technologies – Rather than develop a new technology to stay competitive or to spur product innovation, it may be more cost effective to acquire a company that already owns that technology. Acquisitions give you the unique ability to pick a “winner” amongst the various versions of a particular technology.
- Consolidate – Acquisition of a company in the same markets with the same products or services as your business allows you to increase purchasing power or reduce redundant expenses by capturing economies of scale.
- Stabilize Financials – Buying and incorporating a business with higher margins will bring stability to your balance sheet. Cash cows die and businesses are affected by cyclicality and seasonality – an acquisition lets you invest in a new breed.
- Expand Your Customer Base – Some corporate customers are tough to penetrate, and having your sales people try to steal them often just won’t work. Acquiring a competitor will give you access to their customer list and the relationships they have built.
- Add Talent – Bringing aboard a seasoned executive or dynamic development team from an acquisition brings fresh human resources to your business. Acquiring for this purpose can be seen as a “group hire.”
- Get Defensive – The best way to fend off a competition may be to directly purchase the competitor itself or by to buy a valuable company that your rival is positioned to acquire.
I’ve mentioned in an earlier post the importance of having ONE reason to buy, not several. Hopefully this menu of common motivations may help you focus on your singular purpose for an acquisition.
Let me know your thoughts. Your comments are always welcome.