Why Companies Make Acquisitions

It has been brought to my attention that in my last post titled “Top 5” reasons for buying a business we looked at the advantages of buying a business strictly from an individual’s perspective.  So, today, let’s take a look at business acquisitions from the perspective of an acquiring company.

Unlike individual owners, existing companies acquire for reasons ranging from infrastructure needs, to growth expectations, to poison pill acquisitions.  Since every company is different and the reasons for acquisition vary, it is nearly impossible to say why an acquisition is attractive to a corporate buyer (unless you’re an insider privy to this information).  So, rather than rank this list, let’s just explore some of the reasons.  I’ll leave the rankings to you.  

  • Access to Customers – having access to another company’s customer base allows you to sell your products to a new audience.  In the same breath, the company you acquired may have existing products that you can offer for sale to your customers.  As you’ve heard before, it’s cheaper to sell to existing customers than to find new ones.     
  • Intellectual Property (“IP”) and Proprietary Technology – it is often easier and more cost effective to acquire a company’s IP than to try to build your own.  Examples include:  software, trademarks, trade names, etc.  
  • Product Line Extension – this is a much debated topic.  Some feel that a company should focus strictly on what they do best (avoiding brand dilution); others feel that the more you can offer the customer the better.  I’ll let you decide.  But, the idea is the more products or services you can offer to the customers the better.  
  • Eliminate a competitor – you remember the old saying, “If you can’t beat ‘em join ‘em.” This follows along those same lines.  One way to eliminate competition is to join forces and form a bigger, more powerful entity.  
  • Economies of scale – certain functions within any organization are scalable whether it is increased buying power, purchasing discounts, reductions in overhead or operating efficiencies.  No matter what you may have heard, sometimes bigger is better.  Just ask Wal-Mart!  
  • Financial Leverage – depending on the financial condition of both your company and the target, it is in some instances advantageous to purchase a business simply to improve you balance sheet.  Strengthening your company’s balance sheet means greater access to capital. 
  • Obtain Infrastructure – this can be a big one.  Better distribution channels, access to a greater supply chain, better facilities and access to cheaper labor, all great reasons for acquisition.  
  • Poison Pill – this one is a little different.  Unlike the other reasons which center on growth and improvements to an organization, this one focuses on the defensive.  Acquiring a poison pill involves purchasing a less attractive or troubled company (a poison ill) to avoid a takeover of your company. 

These are just some of the reasons, there are many others.  Feel free to share your experiences….