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any acquisitions are opportunistic. Word of a possible sale arrives through personal contacts or financial advisers and a company decides whether the potential acquisition suits its business. This serendipity approach can often lead to muddled thinking and problems later on.
The better alternative is for the acquirer to take matters into its own hands and actively seek acquisitions. This is harder work and takes longer but often results in a better understanding of the target business, its people, culture and issues. Perhaps most importantly, it avoids an auction sale where the buyer is chosen only by the highest bid - not the best match.
Why make an acquisition?
The benefits of well-planned acquisitions are widely recognised. But what are the reasons for an acquisition? When a business reaches a certain size, an acquisition can help it move to the next stage more quickly and effectively than through organic growth. But there are other specific business reasons to consider.
Increase market share
An acquisition can help rapidly increase market share both geographically and in terms of turnover. For example, a magazine publisher may purchase another company to expand its existing stable of titles. Car dealership groups may acquire new dealerships to broaden their geographical footprint. Extra turnover and gross margin is added to the existing business without any material increase in overheads.
Diversify activities
Many acquisitions stem from a desire to diversify. By branching out into new areas, businesses hope to decrease the risk of over-exposure to one particular market. Many farmers have diversified away from core farming activities to expand into land management or leisure. Other businesses choose to diversify into complementary activities - so a business providing catering and security may choose to add, for example, cleaning services.
Vertical integration
An acquisition can help a business move up or down the supply chain - vertical integration. This can deliver numerous benefits and enhance sales. However, the risks include competing with your existing customers or suppliers.
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By Brian Livingston, Head of Mergers
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