For companies in many industries, expanding your footprint is the name of the game. Companies must design business strategies to penetrate new markets and reach relevant customers. Here we will understand difference between acquisition, takeover and a merger, business acquisition strategies and types of acquisition.
Well planned acquisition strategies can offer a promising roadmap to success. They can diversify revenue streams, broaden the capabilities and increase the dominance of business in critical sectors. Business acquisition strategies can have many objectives like combining big companies via mergers or acquiring new technologies at a lower cost or removing excess capacity from an industry.
What is the Difference Between Acquisition, Takeover and a Merger?
- Acquisition describes a transaction where both the business entities co-operate.
- Takeover describes a situation where the target business entity opposes the transaction.
- Merger describes a transaction where both the business entities combine to form a new business entity.
Post acquisition the parent company has to go through acquisition integration which is a process of integrating all the operations and systems of the target company with the parent company.
Parent company also needs to follow acquisition accounting guidelines, which is a branch of financial accounting and describes how assets, liabilities, and goodwill should be reported by the buyer on its consolidated financial statements.
Business Acquisition Strategies
- Improving Target Company’s Performance
- Consolidation To Remove Excess Capacity
- Accelerate Market Access For Products
- Get Skills Or Technologies At A Lower Cost
- Exploiting Scalability Of A Business
- Acquire Winners Early
- Roll Up Strategy
- Improving Competitive Behavior
- Transformational Acquisition Strategy
- Buying At Lower Cost
- Finding Your Verticals
- Looking For Mature Markets
- Increasing Your Capabilities
- Gaining Market Share
- Diversification Of Products And Services
- Defensive Acquisition Strategy
- Following Your Customers
- Replacing Leadership And Expanding Talent
- Cost Cutting And Stabilizing Financials
- Full Service And Product Supplementation
- Vertical Integration Strategy
- Geographic Growth Strategy
- Market Windows Strategy
- Sales Growth Strategy
- Synergy Strategy
Improving Target Company’s Performance
Improving the performance of the target company is one of the most common acquisition strategies. You buy a company and radically reduce the cost to increase the profit margins and cash flows.
Such strategies are best for private equity firms. In general, it is easier to improve the performance of a company with low margin and low return on investment than a company with high margin and high return on investment.
Consolidation To Remove Excess Capacity
Over time, as industries mature, new competitors enter into the business. At the same time, existing companies develop new strategies to increase the production from the existing plants.
This combination increases the supply and reduces the profit margin across the industry. Acquisition helps the combined entity to become more profitable by shutting down a few plants and removing excess capacity.
Accelerate Market Access For Products
Sometimes new companies with innovative products and strategies find it difficult to reach potential customers and business entities as they do not have large sales force to build new customer relationships.
In such situations, bigger companies can acquire these innovative companies and use their huge sales force to accelerate the business strategies of smaller companies.
Get Skills Or Technologies At A Lower Cost
This strategy is mostly deployed by technology based companies. Instead of developing their own technology, they buy other companies with technologies they require to enhance their own products.
They do this so that they can acquire the technology faster and possibly at a lower cost, keep the technology away from competitors and sometimes avoid royalty payments on patented technologies.
Exploiting Scalability Of A Business
Economies of scale can be an important value creation strategy in acquisition where a larger company can buy a smaller company with scalable business. Economies of scale must be unique and large enough to justify such acquisition strategies.
Acquire Winners Early
This strategy involves making acquisitions early in the life cycle of a company, which has new and innovative products or business ideas, before other companies can recognize that it will grow significantly.
In this strategy, acquiring company should be willing to make early investments and should have the necessary skills and patience to grow the acquired business.
Roll Up Strategy
Rollup strategies are used for consolidation across fragmented markets where the existing business and competitors are too small to achieve economies of scale.
Such strategies work when the combined business entity is able to realize substantial cost savings and achieve higher revenues and profit margins than individual business.
Improving Competitive Behavior
Consolidation helps the companies in improving the competitive behavior by reducing the focus on price competition and thereby improving the profit margins and return on investment.
Transformational Acquisition Strategy
Transformational acquisition strategy is much more than a simple combination of individual companies. If the business team executes this strategy well then the combined entity can be transformed entirely into a new company.
Buying At Lower Cost
This is one of the most sought after strategies but the opportunities are rare and relatively small. This strategy involves buying another company for a value which is less than the intrinsic value of its business.
Over the longer periods, the market values revert back to intrinsic values. However, there are some brief moments where such opportunities are available due to over reaction to some negative news.
Such strategies are mostly used in cyclical industries where the market value is less than the intrinsic value at the bottom of the cycle. Buying an undervalued business at the bottom of the cycle can be a very profitable strategy.
Finding Your Verticals
Initial interest in a single industry is fine when your company is getting off the ground. But achieving excellence across diverse sectors and business areas is essential for thriving in the performance ecosystem.
Strategic acquisitions should either strengthen your company’s position in existing vertical or should provide you a way to achieve market leadership in another vertical. By acquiring other verticals, you can complement your existing business and make your products stronger and more profitable.
Looking For Mature Markets
Mature markets or emerging markets have high value customers with high growth potential. Acquisition of dominant companies in mature markets can help your company establish a strong foothold in strategic markets.
Increasing Your Capabilities
Capability acquisition is a very common strategy across manufacturing industry. This type of acquisition strategy can help you to expand your research and development opportunities or to gain access to improved manufacturing operations.
Gaining Market Share
The key to a continuous revenue stream is having a strong and diverse customer portfolio. Acquiring a company to expand your customer portfolio is a common acquisition strategy.
Market share acquisition strategies can accelerate your expansion into new markets or a new business and can also give you a competitive advantage over your existing competitors.
Diversification Of Products And Services
Diversification is a common acquisition strategy in consumer goods industry. Once you have a trusted brand, adding another product to a portfolio can provide you with cost savings as developing a new product from scratch is expensive.
Alternatively, acquiring a trusted brand can help you to compliment your existing portfolio as sometimes smaller companies have better products and dedicated customer base.
Defensive Acquisition Strategy
Defensive acquisition strategy comes into the picture when a company acquires another company simply to prevent another competitor from acquiring it or to safeguard its future market position.
Following Your Customers
If a business has a strong customer relationship and the customers are expanding rapidly into different areas or adopting new technologies, it makes sense to follow your customers.
This can be done by acquiring a company in a space where your customers are expanding. A guaranteed customer makes this acquisition strategy and attractive option.
Replacing Leadership And Expanding Talent
Sometimes an acquisition strategy can be attractive because of the people it brings with it such as technological innovators, or seasoned executives or an exceptional sales team. Such strategies focus more on human talent.
Cost Cutting And Stabilizing Financials
If two companies have similar products or services, combining both of them can help in minimizing the cost of operations and maximizing the capacity utilization.
Stabilizing financials is another acquisition strategy. If you have a product or a service which is seasonal, then acquiring a business with opposite seasonality can help you to stabilize your financials throughout the year.
Full Service And Product Supplementation
Sometimes a business has a limited line of products or services and wants to reposition itself as a full service provider. It can do so by acquiring other companies which can fill this void.
Product supplementation is another acquisition strategy where the company can supplement its existing products with similar products from another company by making an acquisition.
Vertical Integration Strategy
A business may prefer to have complete control over it supply chain including sales to the final customers. This control can be achieved by acquiring suppliers and distributors along the supply chain.
Geographic Growth Strategy
A company gradually builds up a business within a certain geographic area and now wants to roll out its business strategies into a new geographic area. This can be challenging if the business is dependent on local support.
Geographic acquisition strategy can accelerate the expansion by finding another business which has the local presence and the geographic support characteristics required by the company.
Market Windows Strategy
Sometimes there is a window of opportunity opening up in the market for a particular product and the company realizes that it does not have the ability to launch its own product during that window.
The best option for a company is to go for a business acquisition that is already positioned to take advantage of the opportunity with right products and strong distribution channels.
Sales Growth Strategy
Most of the times it is difficult for a business to increase their sales through internal growth which is also known as organic growth as there are various obstacles and bottlenecks. In such scenarios it makes sense to accelerate the growth rate by making an acquisition.
One of the most successful acquisition strategies is to examine other business to see if there are costs to be saved or revenue advantage to be gained by combining the companies.
This acquisition strategy is usually focused on similar businesses in the same market and results in a greater profitability than the two companies would have achieved if they had operated as separate entities.
Different Types of Acquisitions
- Horizontal Acquisition
- Vertical Acquisition
- Conglomerate Acquisition
- Concentric Acquisition
- Hostile Acquisition
- Tuck-In Acquisition
- Bolt-On Acquisition
- Asset Acquisition
- Stock Acquisition
- Accretive Acquisition
- Dilutive Acquisition
- Reverse Acquisition
- Killer Acquisition
- Partial Acquisition
- Leveraged Acquisition
- Creeping Acquisition
A biggest factor while drafting any business formula is competition. If a company wants to grow its business or increase its market share it will have to serve better quality products or try to eliminate the competition.
Horizontal acquisition describes a situation where the competition is eliminated by acquiring the competitor. Both companies have similar range of products and services but after acquisition they have less competition. It is also known as related acquisition.
In vertical acquisition, a company acquires another business entity in the same industry but at different points in the supply chain. Vertical acquisition can either be done by backward integration or forward integration.
For example if a wholesaler, with a monopoly in trading, acquires a manufacturing company producing the same commodity, it will be considered as a backward integration. This will help the wholesaler to get the products at reasonable prices.
If the same wholesaler acquires the retail stores, it will be considered as a forward integration. This will help the wholesaler to retain retail level profits. This entire process is known as vertical acquisition.
Conglomerate acquisition happens when a company acquires another business entity to expand their range of services and products. This helps the company to reduce the cost by consolidating back office operations.
Conglomerate acquisition helps in diversification of risk as both the companies have different product line, operate in different geographies and have different customer base and business models.
Acquiring company can provide its existing products to the customers of the target company and vice versa. This type of acquisition helps in increasing the customer base and achieves better economies of scale.
Concentric acquisition also known as Congeneric Acquisition happens between firms that serve the same customers in same industry but do not offer same products or services. Their products may complement each other.
These types of acquisitions are usually undertaken to facilitate the customer as it would be easier to sell these products together. It also enables the business to provide one stop shopping to customers.
Hostile acquisition occurs when the acquiring company tries to take control of the business without the co-operation of the target company because the management does not want the acquisition to go through.
Hostile acquisition can be accomplished by directly going to the shareholders of the target company and buying their shares or by getting into a proxy fight to replace the existing management.
Tuck-in acquisition occurs when a large business entity acquires a smaller one in the same or related industry. The large company absorbs the smaller company and the acquired company does not retain its individual structure.
Bolt-on acquisition is similar to tuck-in acquisition but the large company does not completely absorb the smaller company and the acquired company remains intact to some degree.
If the acquired company has established goodwill in the market, it is advantageous for the acquiring company to let the acquired company operate as an individual department or division under its umbrella.
In asset acquisition, the acquiring company acquires the assets of the target company. Both the business entities can decide which assets will be acquired and which liabilities will be assumed.
In stock acquisition the acquiring company acquires the stock of the target company either from open market or by approaching shareholders directly. All the assets and liabilities are transferred as it is to the parent company.
Accretive acquisition occurs when the value of the buyer increases after acquiring a specific business. This happens when the price to earnings ratio of acquiring company is less than that of the target company.
Dilutive acquisition occurs when the value of buyer decreases after acquiring another business. This happens when the price to earnings ratio of the acquiring company is greater than that of the target company.
Reverse acquisition happens when a public company acquires a private company so that the private company can effectively become a publicly traded company without issuing any initial public offering.
Killer acquisition happens when a large company acquires a small startup with an innovative product solely with the purpose of discontinuing the innovative product and reducing future competition.
This situation happens when a company thinks that the new product can compete with its own product. It then acquires the new company and terminates the development of the new product, thus killing competition and innovation.
Partial business acquisition is a unique form of corporate restructuring that changes the ownership structure of both the entities. However, the target company continues to remain in business.
Leveraged acquisition, also known as leveraged buyout (LBO) is done using borrowed money. The parent company has to borrow a significant amount of money to cover the cost of acquisition by offering the assets of the target company as collateral for the loans.
Creeping acquisition is done so that the parent company can buy the shares of the target company cheaply from the open market rather than paying a premium for the shares via ordinary tender offer.