When firms choose between the options for pursuing their growth objectives, there are several reasons why acquisitions appear an attractive choice:
Existing products are in the later stages of their life cycles
Business lacks knowledge or resources to develop organically
Speed of growth is a high priority
Competitors enjoy significant advantages that are hard to overcome
Looking at the history of business acquisitions over recent decades, it is possible to identify a wide range of reasons why they have been made:
Possible Reasons for Making Acquisitions
Speed of access to new product or market areas
Increase market share
Acquire new skills
Access economies of scale (perhaps by combining production capacity)
Secure better distribution
Acquire intangible assets (brands, patents, trade marks)
Overcome barriers to entry to target markets
Defend itself against a takeover threat
Enter new segments of existing market
To eliminate competition
Spread risks by diversifying
To take advantage of deregulation
The main upsides and downsides of making acquisitions can be summarised as follows:
Advantages of Acquisitions
Disadvantages of Acquisitions
Quick access to resources & skills the business needs
Overcomes barriers to entry
Helps spread risk (wider range of products and greater geographical spread)
Revenue growth opportunities (synergy)
Cost saving opportunities (synergy)
Reduces competition
May enable economies of scale
High cost involved
Problems of valuation
Clash of cultures
Upset customers
Problems of integration (change management)
Resistance from employees
Non-existent synergy
Incompatibility of management styles, structures and culture
Questionable motives
High failure rate
Diseconomies of scale
Many acquisitions are justified (when they are made) in terms of the likely “synergies” between the acquirer and the target. Synergy can be defined as:
When the whole is greater than the sum of the individual parts
In theory synergy arises in two broad ways:
The problem with synergy is that acquisitions normally fail to deliver the promised returns. It is widely accepted that over 50% of takeovers destroy shareholder value – i.e. they do not earn a return (higher profits) that justify the investment made.
Why do acquisitions often fail to achieve the required rate of return and/or fail to meet their original aims? Here are the most common reasons:
Price paid for acquisition was too high (over-estimate of synergies)
Lack of decisive change management in the early stages
The takeover was mishandled
Cultural incompatibility
Poor communication
Loss of key personnel & customers post acquisition
The creation of a lumbering giant that is soon outpaced by smaller rivals
Acquisitions therefore provide some important change management challenges. Not only are they relatively risky actions (certainly compared with internal development), but the risk is heightened if the change management issues are not addressed before, during and after the acquisition.
A fundamental challenge posed by an acquisition is one of corporate culture.
Employees
E.g. Uncertainty about acquirer intentions & strategy (cost savings, rationalisation)
