Why Companies Make Acquisitions

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Opportunities Remain Even As Market Pressures Increase

The facts: Inflation in the US has reached a 41-year high, and the Consumer Price Index is up 9.1% since June of last year, with the biggest economic pain points circling food and energy costs. Groceries are up 12%. Energy prices are up 41.6% annually.

Despite what might seem to some like a negative outlook, private equity still has plenty of cash to put to work.

Growth Through Business Acquisitions

Organic growth can be painfully slow, risky, and inefficient. When a company desires growth, business acquisitions are a savvy way to expand revenue and increase a company’s value quickly.

Even with supply chain difficulties, labor issues, and the looming threat of a recession, acquisitions have become even more appealing to buyers seeking growth through M&A.

When an existing company acquires another business—or multiple businesses, there are a range of reasons to support the acquisition. This may include anything from infrastructure needs, adding more talent to the employee base, or achieving growth expectations. In addition to customer access and a stable business that produces revenue, the benefits to acquiring another business include:

  • Intellectual property (access to software, trademarks, R&D)
  • Extending product lines (increased offering of products and services)
  • Eliminate a competitor (buy the competition)
  • Enhanced economies of scale (increase scalable, buying power)
  • Financial leverage (improve your balance sheet)
  • Obtain infrastructure (access to supply chain, facilities, labor)

 

What Motivates an Acquisition?

Different types of buyers will lead with unique motivations when considering an acquisition. For example, both strategic buyers and financial buyers aim to purchase businesses with the same goal in mind: increased growth over time. However, the strategies they use to achieve this may be different as are the time horizons.

A financial buyer can see a path toward increasing growth quickly, typically over 3 to 5 years, by using opportunities to create efficiencies, increase economies of scale,  or by investing in growth marketing.  They may also use an acquisition to quickly and significantly increase the overall value of the combined entity prior to an exit.

On the other hand,  since a strategic buyer is already operating in the same industry, the acquisition represents the identification and absorption of a company with products, services and culture that align with theirs.  The acquisition most likely provides cross-selling opportunities immediately, but having similar cultures is most important to have a successful integration long term.

The best buyer for your company will be contingent on your short-term and long-term goals. Want to learn more about how the M&A process can help your business? Reach out and schedule a consultation with our M&A advisory team.