What reasons can you think of to explain why a company should take over another one
Updated 03 November 2022 Show
8min read A company acquisition can be a fast track to business growth. Like merging with another business, it can give you access to new customers, distribution channels, skills and knowledge, while putting more resources at your disposal (e.g. personnel, additional branches, intellectual property and so forth). A business acquisition may also help you to develop your own products or services. But with such a great opportunity does come risk. There’s no magic formula to guarantee a smooth ride, but with a considered approach you can keep the risks manageable. Here are the key steps to start you on that road. What is a company acquisition / takeover?A company acquisition or takeover is where one company purchases most or all of the shares of another company, to become the majority shareholder or outright owner. As majority shareholder, you can make decisions without the consent of other shareholders, so effectively run the business. You may choose to absorb the acquired business into your own company and put your own branding in place, or keep its current identity and make it a sub-brand of your own. Keeping its original identity may be preferable if good brand recognition and customer goodwill.are among the target company's most important assets. I’m thinking about an acquisition. Where should I start?The first thing you need is a specific strategic rationale. There should be a clear reason for making the acquisition of that particular company at that particular time. If the reason for a merger or acquisition is vague, like ‘to grow the business’, it’s worth giving it more thought. Your specific reason and objectives will ultimately be the driving force of all decisions around the acquisition, and will allow you to measure your success later, so be as clear on this as possible. How to find a target company for takeoverThe best way to choose a business for acquisition is to pick the one that complements your own most effectively. A badly performing business may represent good value – if you have what it takes to turn it around. Lots of large firms do this, but it’s a margins game. Before attempting it, you need to be absolutely sure of your sums (speak to an accountant about those) and your capabilities. Put simply, it is a question of looking at what your own business currently lacks but could benefit from - whether that is additional capacity, better systems and processes, supply chains, technologies, personnel, reputation, branding, customer goodwill or anything else. You then have to calculate what these assets might be worth to your company, and whether this exceeds (in the long term) the costs of any takeover. Reasons to make an acquisitionHere are some of the main reasons why you might want to take over another business. In most cases, more than one will apply. Your reasons should directly complement your current business goals – see ‘Your acquisition strategy’ below. 1. You believe you can improve the performance of the target companyA badly performing business may represent good value – if you have what it takes to turn it around. Lots of large firms do this, but it’s a margins game. Before attempting it, you need to be absolutely sure of your sums (speak to an accountant about those) and your capabilities. 2. You want to remove excess capacity from the industryIf you’re in a mature industry in which supply is outstripping demand, acquiring a competitor gives you the opportunity to streamline the supply more effectively. 3. You can help the target company to penetrate the marketA smaller target company may be struggling to penetrate the market. What they may be missing is your negotiating power – while you in turn can benefit from the particular qualities they have. Together, you stand a much better chance of securing the big, lucrative contracts. 4. You want to acquire new skills or technologiesBy acquiring a company with the skills or technologies that your business doesn’t have, you can expand or enhance your own product offering. It can be far quicker, cheaper and more effective to acquire these skills and technologies than to develop them independently. 5. You see the opportunity to scale a scalable businessThis is most applicable to smaller acquisitions, because many large companies are using all of their resources. If your business is unable to improve margins by scaling down, it can be a smart move to acquire a smaller business and increase the team or equipment to reduce operational costs. 6. You want to pick a winnerIf you can spot a young business with a huge amount of potential, it can result in a really lucrative acquisition. Some of the most successful acquisitions involve a large company acquiring a startup business and helping it grow and develop. This can be a winning strategy, as long as the target company can keep the magic alive. In choosing your acquisition target(s), you will also need to consider your acquisition strategy. Your acquisition strategyYour acquisition strategy is, essentially, the sum of all your business reasons for seeking this acquisition. You will need to be clear in your own business plan what the long-term goals of your company are, as this will help you choose the right strategy – and the right target for takeover. For example, you can spot a young business with a huge amount of potential, it can result in a really lucrative acquisition. Some of the most successful acquisitions involve a large company acquiring a startup business and helping it grow and develop. This can be a winning strategy, as long as the target company can keep the magic alive. The eleven basic acquisition strategies:
How to analyse a company for acquisitionBe sure to do your homework on a target company before making your initial approach.
How should I go about it?So you’ve decided to make an acquisition. Do you start by looking around at the companies that are available? Wrong! That’s a reactive approach. Doing it that way would mean you only find a limited range of opportunities that might not be the best fit for your long-term business goals. Broadly speaking, the correct approach looks more like this: Pick a team. Within your company you should have a working group with representatives from each area of the business. They need to be able to work together and communicate clearly from the off. Make a plan. Why are you doing this? What are your specific objectives? How will you finance the deal? Consider the list of goals above and make sure your plan is designed to meet at least one. Name a price. Value is a tricky thing, and it’s hard to nail down what the right acquisition is worth to your company. You need to understand the financials inside out, which is when a good accountant is essential. A solicitor will help make sure your contracts are watertight, and you’re also need to think ahead about how you’ll raise funds if you need them. Approach. Once you've got your plan and your optimal price tag for your acquisition, it's time to identify potential targets and make your approach. A phone call is the best way to begin, as it comes across as more personal, committed and bold, and so helps to build trust from the outset. Obtaining funding for business acquisitionsAcquisitions are expensive, so it is likely you will need additional funding to achieve one (often known as 'corporate finance'). Some accountants are corporate finance specialists and can help you obtain the funding you need. You will need a strong new business pitch to demonstrate how your company will thrive post-acquisition and repay the investment. Ultimately, the golden rule of acquisitions is ‘Be 100 per cent sure of why you are doing this’. With your specific goal fixed in your mind, you should be able to press on through each challenge even when things aren’t going your way. Now find out about mergers and how they’re different from acquisitions. If you found this article helpful, make sure to have a look at our article all about how to buy out a business partner, too. Match meI’d like to speak to an accountant Why a company should take over another one?Reasons for a Takeover
By buying the target, the acquirer may feel there is long-term value. With these takeovers, the acquiring company usually increases its market share, achieves economies of scale, reduces costs, and increases profits through synergies. Some companies may opt for a strategic takeover.
Why a company would want to take over another company justify your answers with examples?The most common factor is the potential growth of the business. A business merger may give the acquiring company a chance to grow its market share. In addition, diversification in the business puts companies at an advantage when they choose to merge or acquire another business.
What motivates a company to acquire a another company?A merger can be motivated by a desire to acquire certain assets that cannot be obtained using other methods. In M&A transactions, it is quite common that some companies arrange mergers to gain access to assets that are unique or to assets that usually take a long time to develop internally.
Why would a company want to be acquired?Finance an Expansion: The acquiring entity has the cash to fund new equipment, advertising, or additional geographic reach, increasing the operational footprint of the target. Raise Capital for an Acquisition: The acquiring entity has the capital or debt capacity to execute an accumulation play.
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