As per discussed in previous articles by Suzzanne Uhland, acquisitions embody one of today’s most strategic means of growth for businesses. However, although the idea behind this move may seem quite understandable and easy to digest, at first sight, reality dictates otherwise: the key to attaining an appealing growth rate through acquisitions is to take advantage of synergies—which ultimately are the ones responsible for yielding a positive outcome when choosing this path.
Business owners often struggle at deciding what to do next with their businesses. Some of them often decide to scan the market looking for good opportunities in the form of businesses, as they certainly believe that growth through acquisitions provides them with a faster, less expensive, and definitely, to some extent, of course, less risky option than the traditional approach of growth. However, acquisitions are not the only way to get a business one step further: some businesses prefer to increase their market share and sales; however, unlike these two aforementioned approaches, acquisitions offer business owners a different set of advantages, including easier and attainable financing for the long-run and immediate savings in costs due to economies of scale.
The vast majority of businesses that have chosen to grow through acquisitions also find several additional advantages as they operate, ranging from catching competitors unexpecting such move and off guard to immediate market penetration. In fact, in some cases, a business can practically eliminate competition via an acquisition. That being said, there here are several important pros and cons, or perhaps the ugly part, businesses should evaluate when considering to grow through an acquisition:
The Good Part
As mentioned above, it is undeniable that acquisitions can be deemed as one of the most time-efficient ways to attain a much positive growth rate. It offers businesses the opportunity to rapidly acquire additional resources and other competencies—especially the ones the company acquiring a business lack. Besides, there is an almost immediate entry into a whole new market, products, and lines, normally recognized and well received by customers. Additionally, the risks commonly associated with product development and market strategies plummet.
By acquiring a company—a good company, of course—businesses can rapidly gain more market presence and share, thusly reducing its competition’s presence. Under today’s rapidly evolving business juncture, competition is more challenging than ever before. Whenever companies face strong competition, growth via acquisitions definitely reduces competitor capacity in the market. As initially said: the idea is to take advantage of the synergies.
New Competencies and Resources
In addition to gaining more presence and market share, acquisitions is also a way to gain more resources and competencies. In fact, many businesses decide to go for this option simply because of this, as they do not possess them. These provide companies with increased revenue, and the possibility to expand during different economic periods.
Acquiring a business with low share value can definitely bring gains due to assets striping. The synergy between both companies translates into substantial costs savings and more efficient use of resources.
Less Entry Barriers
Acquiring a business also brings along the opportunity to get past some challenging and tough entry barriers while diminishing the risk of competitors reacting to it. Market entry is something that has always been a major concern for both startups and well-established businesses; however, market entry, since it can be an expensive endeavor, can be overcome through this approach.
The Bad Part
When acquiring an existing organization, the business interested in acquiring this entity may be open to several negative aspects. For example, returns may not directly benefit stakeholders as anticipated, or at least, not in the extent, they expect it to. Besides, the expected cost savings may take longer to materialize, which ultimately leads to a much higher price of the acquisition, fewer synergies than expected, loss of management, etc. In fact, this is particularly concerning given the myriad of aspects a company must evaluate prior to recklessly laying its hand on another company in hopes of attaining a more positive growth rate.
In some cases, the cost of an acquisitions gains value all of a sudden. In fact, it can climb way beyond the initial expectations and projections. This is particularly common in cases of rushed acquisitions—where details are neglected. In other situations, the added value may not offset the costs and resources that were destined to make the acquisition something real.
Integrating both entities is definitely easier said than done. Integration of an acquired business brings a sheer array of challenges: corporate and cultural clashes, for example, stand out amongst the traditional difficulties. Every organization is used to working differently, which is why this clashes often emerge, thusly impeding a rapid integration. Employees, on the other side, may also show a certain degree of resentment during and after the acquisition.
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