Module 2 — M&A: The Good and the Bad

Chapter 2.3

Why do companies opt for an Acquisition?

In an acquisition, a company buys more than 50% of or all of another company’s ownership to gain control over it. As part of the deal, the acquiring company buys the other company’s stock and assets.

The following are some of the reasons why a company opts to acquire another:

 

  • High growth in minimum time: If a company want to achieve high growth in minimum time, acquisition is one of the best options. Through acquisition, the acquirer company can get hold of resources and core competencies which are not in the former’s possession. That way, the risks and cost related to new product development can be avoided.
  • Gaining market share: An acquisition will help a company get more market share, while reducing the threat from competition. If a company acquires its competitor, it reduces the competition’s stronghold and helps in obtaining synergy.
  • Overcome the entry barrier: Since a company is acquiring an existing company, the cost of entering the new market will be considerably low. Along that, the threat posed by competition is reduced as well as the acquirer can benefit from the acquired company’s existing client base.
  • Gain resources and assets: When a company acquires another, the acquirer gains the resources, experience of the employees, goodwill and the key assets of the other company. If the business acquired provides complementary products and/or services, it enhances the acquirer’s efficiency and productivity.
  • Tax benefits: Under certain instances, a company can enjoy taxi benefits if they acquire a less profitable company operating in the same industry.