Why Companies Acquire Other Companies

Companies acquire other companies in order to build on strengths and weaknesses of the acquiring company. This method is also known as Business Acquisition or Business Takeover. Through this process, one company take control of interest & management of a targeted company. Before deciding to acquire other companies, the management team of a company needs to analyze the market. It is important to consider how acquiring a company can help the ambitions of the business before deciding to venture into one. There are different factors that motivate companies to start off with acquiring other companies. These factors vary depending on the ambitions behind each business in the market. In the business world, companies like to compete with one another to stay on top of everyone. There are business companies that are more successful than others all the time. And the other businesses continue on their way to work hard and grab opportunities so that they can be succeeded as well. One of those opportunities includes the business acquisition or acquire.

Why Companies Acquire Other Companies

There are many reasons why companies acquire other companies. Some of the reasons are discussed here.

1. Improve Financial Position: Improved financing is a motive for acquiring companies. If a company is in financial trouble, it may look for another company to acquire it. Otherwise, that company will go under bankruptcy.

2. To Stay Competitive in the Marketplace: In order to stay competitive in any given marketplace, companies need to acquire other companies. By acquiring a smaller company that has a new and innovative technology, a larger & developed company can set up its place in the market. It will help to increase business’ market and distribution in abroad market. It will also help to have greater sales opportunities in other parts of the country or the world.

3. Horizontal Acquisitions: A company engages in a horizontal acquisition when a competitor in the same industry is acquired. A company’s market power will be increased through buying another company. The horizontal acquisition will help the company to become a bigger one and also help to expand its market in the native market.

4. Vertical Acquisitions: Vertical acquisition occurs when a company acquires a supplier or distributor, which is positioned either backward or forward in the company’s cost, activity & value chain.

5. Overcoming of Entry Barriers: Companies face entry barriers when they try to enter international markets. Acquisitions are used to overcome entry barriers in international markets. Acquiring companies is important to be successful in the business world.

6. Lower Risk Compared to Developing New Products: After entering a new market, companies need significant resources and time to develop new products and to earn an acceptable return on investment. Acquisition will make it easier and accurate for the foreign companies. It will happen because managers view acquisitions as carrying lowering risk.

7. Strategic Goals: Companies acquire other companies for strategic goals as well. The acquisition includes re-inventing the company, increasing and strengthening market share, accessing new markets, acquiring new products & services, gaining access to resources etc.

8. To Learn and Develop New Capabilities: Sometimes it is expensive & impossible to learn the core competency of a competitor. In that case, acquiring the competitor’s company would be the best option.

9. Economies of Scale: Companies acquire other companies in order to create additional savings. Such as accounting, marketing, and management functions can be consolidated and companies can eliminate these redundancy costs.

10. Size Can Matter: By acquiring other companies, one company can gain the benefits of being a larger company. That larger company can have better borrowing costs, better negotiating power and pricing and stronger appeal for potential new hires. Vendors, consumers, and employees get attraction toward established brands and market leaders for stability and confidence. In this case, the larger company will be benefited.

There are so many other reasons besides these. Such as:

  • New products or services
  • Employees
  • Faster growth
  • Reshaping the company’s Competitive Scope
  • Increased Diversification
  • Changing the leadership of a business

Acquiring with another can be a good investment when it comes to accomplishing one company’s long-term goals. Acquiring with another company must create a value that is higher than the output of two companies individually. So, in the end, it can be concluded that if a company is looking to move its business forward, then it should consider the strategic acquisition of another company.


REFERENCES:

  • thehartford.com/business-playbook/in-depth/business-acquisition-pros-cons
  • thebalance.com/why-do-companies-merge-mergers-and-acquisitions-explained-392847
  • investopedia.com/ask/answers/06/mareasons.asp
  • en.wikipedia.org/wiki/Business_acquisition
  • quora.com/What-does-happen-after-acquisition-of-a-company-by-another-company
  • vfrlawfirm.com/blog/2016/06/why-do-companies-merge-or-acquire-other-companies.shtml
  • openlearningworld.com/books/Corporate%20Strategies/Diversification%20Using%20Mergers%20and%20Acquisitions/Reasons%20for%20following%20Acquisition%20Strategies.html
  • cio.com/article/2892329/mergers-acquisitions/reasons-mergers-and-acquisitions-happen.html
  • acbrokersinc.com/mergaq-acquire.php#s6
  • nhbr.com/March-3-2017/8-reasons-to-grow-through-acquisition/
  • quora.com/Why-do-companies-acquire-other-companies

Sadnan Bin Sattar

Sadnan is one of the top contributors of Gotabout Business Strategy and Analysis. He is an undergrad student of North South University; major is Finance and Accounting. He has a strong interest in strategy development.