Module 2 — M&A: The Good and the Bad

Chapter 2.4

Issues related to Acquisitions

When a company chooses the path of acquisition, the idea is to increase their revenues by acquiring a functioning company that will contribute to the income. However, acquisitions can present some difficulties and actually put the acquirer and the acquiree at a disadvantage.

Some issues that should be considered before pursuing an acquisition are:

  • Increase in debt: If a company has to borrow money in order to go ahead with acquisition, the debt so caused will be recorded on the books of the acquirer and they have to compensate for the debt from the revenues of the acquired company. In addition to this, the acquired company might also be having debt on its own, which get transferred to the acquirer.
  • Conflict of ideas: If the two individual companies have been working in different areas prior to the acquisition, they will be having ideologies and objectives of their own. If proper care is not taken to address these, it could escalate to a level where the difference begin to affect the day to day activities.
  • Layoff of employees: More often than not, an acquisition results in a company with employees who replicate one another’s work. In order to avoid paying more employees than needed, for doing the same job, management opts for laying off the redundant employees. This reduces employee motivation as they live in constant fear of losing their job, which in turn affect the productivity of the company.
  • Conflict of work culture: Every company has its own identity and the work culture developed by the company plays a huge role in making this identity. If there is no compatibility between the cultures of the two companies involved in the acquisition, it gives rise to conflicts, right from the employee level.
  • Saturated market and unrelated diversification: If a company is to acquire another in the same industry, then the scope for market expansion is low, since both companies together might be enjoying majority of the market. On the contrary, if a company aims for diversification and acquires a company in a different industry, there could be difficulties in managing the resources and capabilities as everything is new to the acquirer company.