Looking to better understand business acquisitions?
In this article, we will look at the pros and cons of business acquisitions to give you a quick overview.
A business acquisition is when one company purchases the shares or the assets of another.
There are different types of acquisitions:
- Acquisitions are when both companies survive
- Mergers where one company services and the other one is dissolved
- Amalgamations are when neither company survives
Type of business acquisitions
Share deal or asset deal
When a company buys the shares or assets of the other company, the acquiring company will be enabled to make decisions about how to run the target company or how to make use of its assets.
Business acquisition
Mergers and acquisitions are similar in nature but they nonetheless have different legal structures.
In a business acquisition deal, one company acquires the other and both companies continue to survive.
Typically, one company will become the parent entity of the other entity.
Merger
In a merger, the two companies combine into one surviving entity.
The other company will be dissolved and cease to exist.
Amalgamation
The other type of corporate transaction is an amalgamation.
In this type of transaction, the two companies will cease existing and they will be combined into a totally new entity.
Benefits of an Acquisitions
Business acquisitions offer some advantages and disadvantages in the grand scheme of things for businesses.
Market penetration
Business acquisition can help your company reduce barriers of entry when penetrating a new market.
Acquiring an established business having a good reputation in its industry, a profitable product line and years of reputation and brand equity is a great advantage you can tap into immediately.
Market power
Business acquisition can be done for consolidating your market power in your industry.
Acquiring a competitor can increase your market share and provide you a competitive advantage over other competitors.
If you can take advantage of possible synergies with the competitor you acquire, you can create additional value merely through the business acquisition.
Access to know-how
You can access the know-how and competencies of the company you acquire through a business acquisition.
Your target company may have access to resources and know-how that you can leverage to provide your organization with long-term growth and financial gain.
Access to key personnel
Business acquisition can be valuable to capture key resources and experts in a particular domain.
You may find it difficult to find the specialists you need to grow your business.
Acquiring a company with the type of personnel that you need to could a value-adding business transaction.
Access to capital
Another advantage of a business acquisition is to tap into your target company’s cash, cash investments and marketable securities.
This could be quick access to money that you can leverage to build on your growth strategy.
Disadvantages of an Acquisitions
Cultural conflicts
Every company has its own culture.
When one company acquires the other, the culture the acquiring company may want to impose may result in an important internal conflict.
If the cultural integration is not well-managed, the employees and management of the two entities will have significant difficulties in smoothly integrating their operations.
Redundancies
One advantage of a business acquisition is to take advantage of synergies.
In some cases, if the acquiring company does not manage the acquisition and integration well, they may deal with duplicate work, redundant projects and different people doing the same thing in silos.
Poor business transaction
It does happen that the acquiring company miscalculated and thought they were buying a good company but after the acquisition, it appears that the two businesses did not produce the intended benefits.
In some more unfortunate cases, the acquisition will lead to a worse outcome for the acquiring company.
Loss of key resources
A poorly managed business acquisition can lead to you losing key personnel shortly after the acquisition.
This could be damaging particularly if the acquisition was to access experts and key personnel having a unique talent or knowledge.
Takeaways
A business acquisition can be highly strategic for an organization to scale, penetrate new markets and tap into new opportunities.
A company can accelerate its growth through an acquisition strategy allowing it to increase its market share, access key resources and know-how.
Acquisitions should be properly managed on the other hand.
If mismanaged, an acquisition can potentially hurt the acquiring company more than anticipated.
Perhaps even set it back.
When considering a business acquisition, make sure you thoroughly evaluate your options to ensure the business transaction will in fact bring you value.
