An acquisition occurs when one company purchases (or acquires) another company.
It is a strategy through which one firm buys a controlling or 100 percent interest in another firm by making the acquired firm a subsidiary business within its portfolio.
The first company (acquirer), after purchasing the company, absorbs the operations of the second company (the acquired). The acquired company is merged with the first company. The acquired company’s legal identity is lost. The acquirer company remains independent and operates its business as it is.
In many cases, it is very difficult to adopt a new venture strategy for diversification of business.
Because it takes long years to develop knowledge resources, the scale of operation and market reputation.
To avoid the difficulties of implementing new venture strategy, some companies diversify if business via the acquisition of an existing firm.
The ‘to-be-acquired’ firm may be either a reputed, well-established firm or a weak firm but has a high potential of profit. If a company acquires an. Already established firm, it can move directly to build an upmarket position.
Acquisition ‘offers an effective way to hurdle such entry barriers as acquiring technological experience, establishing supplier relationships, becoming big enough to match rivals’ efficiency and- unit costs, having to spend large sums on introductory advertising and promotions to gain market visibility and brand recognition, and securing adequate distribution.’
When the Standard Chartered Bank absorbed the operations of the Grindiays Bank in South Asia and South-East Asian region, it was Standard Charter’s acquisition strategy. In the international arena, numerous mergers are taking place every year.
For example, in 2003-2004 Yahoo! acquired Inktomi Corporation; John and Johnson acquired Scios; Pfizer acquired Pharmacia; Oracle acquired PeopleSoft, and Kodak acquired Practice Works.
The major reasons for acquisition are;
- increase market power,
- overcome entry barriers,
- reduce the cost of new product development,
- increase speedy access to market,
- reduce risk compared to developing new products,
- increase diversification ! of businesses,
- providing improved capacity utilization,
- making better use of the existing sales force,
- gaining economies of scale, and
- avoid excessive competition.
An Acquisition Strategy Works Well When Companies
- Lack of important competencies required to compete in the business area where they want to enter;
- Speed is important and they need to move fast (acquisition is a quicker way to establish market presence and generate enough cash flow);
- Contemplate entering into businesses with less risk than an internal startup, as they acquire known profitability, known revenues, and known market share, all of which reduce uncertainty.
- Find that the to-be acquired firm enjoys significant protection from barriers to entry into the industry concerned (acquisition is favored when entry barriers are many and difficult to overcome).
Situations Unsuitable for Acquisition Strategy
However, evidence shows that acquisition strategy does not work well in many situations.
It fails to add value to the parent company and even dissipates shareholder value. Many acquisitions destroy rather than create value.
When the acquisition strategy fails, it fails because;
- companies often experience difficulties when trying to integrate divergent corporate cultures,
- companies overestimate the potential economic benefits from an acquisition,
- acquisitions tend to be very expensive and
- companies often do not adequately screen their acquisition targets.
Purposes of Merger and Acquisition Strategies
The purposes of merger and acquisition are primarily similar. They can;
- dramatically strengthen a company’s market position;
- open new opportunities for competitive advantages;
- fill resource gaps and allow the new company to do things which the prior companies could not do alone;
- combine the skills and competitive capabilities of the merged companies;
- achieve wider geographical coverage and greater financial resources;
- add production capacity and expand into new areas; and/or
- ensure considerable cost-saving through combining operations of a number of companies.
Suitability of Both Merger and Acquisition Strategies
Mergers and acquisition are suitable in situations where strategic alliances do not yield desired results because of the lack of ‘sense of ownership.’
Mergers and acquisitions allow the partnering firms to have ownership relations, rather than partnership relations.
They are a very effective international business, too.
Through merger and acquisitions, companies can build a good market presence in other countries. Companies may merge or make an acquisition to fill in resource and/or technology-gaps. Nestle, -Kraft, Procter, and Gamble have made several acquisitions to establish a stronger global presence
There are hundreds and thousands of examples of mergers and acquisitions all over the world.