9 Types Of Successful Acquisitions

The most successful deals are those in which the acquirer has a specific, well-grounded plan for how to create value. The reasons for less successful deals being made are often vague, such as trying to increase international scale, filling portfolio gaps, or building a third leg of the portfolio.

Although empirical analysis of specific acquisition strategies can provide some insight, it is often limited due to the immense variety of types, sizes, and objectives of acquisitions.

Even if the stated acquisition strategy is not the real one, companies typically talk up the strategic benefits from acquisitions that are really entirely about cost cutting.

Without any empirical research to go off of, our suggestions for strategies that create value come from our acquisitions work with companies.

Successful Acquisition Strategies

The strategic rationale behind an acquisition should be specific and fall into one of a few categories, rather than being a vague concept like growth or strategic positioning, which are important but need to be more concrete.

It won’t create value if you overpay, even if your acquisition is based on one of the archetypes below.

1. Improve the Target Company’s Performance

A common way to increase the value of a target company is to improve its performance. Essentially, you purchase a company and significantly reduce expenses to increase profits and cash flow.

In some cases, the acquirer may also take steps to increase revenue growth.

This is the best strategy for private-equity firms.

Target companies that were bought, improved, and sold by private equity firms saw an average increase in operating-profit margins of 2.5 percentage points more than their peer companies during the same period.

This means that an increase in transactions led to an increase in operating-profit margins.

It is easier to improve the performance of a company with low margins and low returns on invested capital than that of a company with high margins and high returns on invested capital.

Compare this company to an industry average company that has a 10 percent operating-profit margin. The target company has an operating-profit margin that is lower than the industry average company. Cutting costs by 3 percent could increase the company’s value by 50 percent.

If a company’s operating-profit margin is 30 percent, a 50 percent increase in value requires an increase in margin to 45 percent.

The cost base would need to be reduced by 21 percent, from 70 percent of revenues to 55 percent. That might not be reasonable to expect.

2. Consolidate to Remove Excess Capacity From Industry

As industries mature, they typically develop excess capacity. Even though there are new competitors constantly entering the industry, companies are still looking for ways to get more production out of their plants.

If there is more supply than demand, this often happens because existing businesses are producing more, and new businesses have entered the market. No one competitor would want to close a plant.

Companies often find it easier to close down plants after an acquisition, rather than closing down their least productive plants and ending up with a smaller company.

This includes things like intellectual property, organizational knowledge, and the ability to absorb new technologies. Reducing excess capacity can also extend to less tangible forms of capacity, such as intellectual property, organizational knowledge, and the ability to absorb new technologies.

The pharmaceutical industry has seen a lot of consolidation recently, which has led to a reduction in the size of sales teams. This is because when companies merge, their product portfolios change and they have to rethink how they interact with doctors.

Research and Development (R&D) departments in pharmaceutical companies have seen a reduction in size as the companies have found more efficient ways to conduct research and have cut back on the number of development projects.

The value that comes from removing excess capacity is substantial, but in most cases, the majority of the value goes to the seller’s shareholders rather than the buyer’s.

The free-rider problem is that all the other competitors in the industry may benefit from the capacity reduction without having to take any action of their own.

3. Accelerate Market Access for The Target’s (or Buyer’s) Products

Small companies that innovate often have difficulty reaching their entire potential market.

Small pharmaceutical companies usually don’t have big enough sales teams to get close to the large number of doctors they need to market their products.

Acquiring smaller pharmaceutical companies and utilizing their sales forces is a way for larger companies to increase the sales of the smaller companies’ products.

IBM, for example, has followed this strategy with its software business.

IBM acquired an average of 43 companies per year between 2010 and 2013, each for approximately $350 million.

IBM was able to increase the acquired companies’ revenues by more than 40% in the first two years after each acquisition by pushing their products through IBM’s global sales force.

The target can help the acquirer’s revenue growth in some cases.

P&G and Gillette both gained advantages in different emerging markets after P&G acquired Gillette. Introducing their products into new markets was much quicker when working together.

4. Get Skills or Technologies Faster or at Lower Cost Than They Can Be Built

Many companies that are based around technology will purchase other companies that have the technologies that they need in order to enhance and improve their own products.

They do this in order to be able to get the technology quicker than if they developed it themselves, they wouldnt have to pay for any patented technologies, and it would keep the technology away from their competitors.

An example of this is when Apple purchased Siri (the automated personal assistant) in 2010 to enhance its iPhones. Apple purchased Novauris Technologies, a speech-recognition-technology company, in 2014 to improve Siri’s capabilities.

In 2014, Apple purchased Beats Electronics, which had recently launched a music-streaming service. The music industry was moving away from Apple’s iTunes business model of purchasing and downloading music, so Apple acquired a music-streaming service to offer its customers.

Cisco used acquisitions to get key technologies and create a line of products that work together during the Internet growth period.

From 1993 to 2001, Cisco acquired 71 companies, with an average price tag of around $350 million.

Cisco acquired companies rapidly from 1993 to 2001 and their sales increased from $650 million to $22 billion as a result. direct revenue from these acquisitions made up almost 40 percent of their 2001 income. As of 2009, Cisco’s revenues were over $36 billion and their market capitalization was about $150 billion.

5. Improving Financial Performance

Many companies try to buy other companies that are doing well financially or that have the potential to do well.

After they gain control of the new business, the new owners will save money by reducing overhead costs, mainly by decreasing spending on human resources or by selling their products in new markets.

A small decrease in costs can improve profitability by using existing resources, and skilled personnel can mean the difference between success and merely getting by.

Larger businesses are able to make an acquired company work better by having improved access to new ideas, a successful business plan, or a product that is doing well.

After making some adjustments and changes, the financial situation improves and the overall finances are better than before the companies merged.

A prime example is Cable TV operator Charter Communications. Charter was trying to attract customers who were getting multiple services from one company instead of just one service. These customers were usually interested in Charter because it offered broadband subscriptions.

Charter was threatened by other companies providing similar services in 2014. Charter purchased Time Warner Cable and Bright House Networks, both of which face similar challenges.

The expansion of Charters’ subscriber base allowed it to create efficiencies in areas such as product development and engineering. Because it had more subscribers, the company was able to charge more and make more money. It also used this opportunity to cut costs in other areas of the business.

6. Achieve Economies of Scale

One common reason given for why companies choose to acquired others is because it allows them to achieve economies of scale. And it is a valid claim. Large companies often buy small businesses that are doing well in order to expand into new markets.

Bigger businesses purchase these prosperous enterprises and capitalize on their increased size, monetary resources, and workforce to make them more successful and efficient.

As economies of scale naturally occur, larger companies will buy profitable products and incorporate them into their manufacturing process to gain control over them.

This means that economies of scale would happen at times even if there was no intervention.

The main purpose of acquisitions is to gain access to a promising market that the bigger company has not focused on. This may be because the bigger company is trying to get better returns in other areas.

7. Growth/Expansion Strategy

I believe that every acquisition is done in order to grow and expand. The goal of expanding your business by introducing a new product line or expanding into a new region is to achieve economies of scale.

This is especially true for new companies that have a successful product.

It is more economically beneficial for a company with a new product to be acquired by a larger company so they can access management and market expertise, piggyback their service, and have access to deep pockets for research and development.

The smaller business can expand its target market smoothly and the larger company can retain its advantage over competitors and expand its business.

The Beats and Apple example showed how Beats was able to grow and expand due to Apple’s large market share and resources. Apple’s profits increased while retaining its technology edge.

8. Start A New Business With Merged Companies

At times, it may be necessary for established companies to investigate new markets or options, especially when they are in the mature phase of their life cycle.

They look for companies with similar or complementary skill sets and merge their expertise to explore new businesses. There was a lot of consolidation in the pharmaceutical and automotive industries in the late 1990s and early 2000s.

In 1995, the new Chairman of Daimler-Benz decided to change the company’s structure as many of its business units were not doing well compared to others in the market. The main goal was to make the company more profitable and keep it relevant to the industry.

In 1998, the company merged with Chrysler Corporation to become DaimlerChrysler AG.

The purpose of the merger was to improve the profitability of the companies by expanding their core businesses and introducing new products.

The main goal was to make the automotive sector more competitive worldwide. After some soul searching, the company decided to close its doors to less profitable business ventures in order to share its focus on the main product lines.

This is common in a sector that has a lot of maturing companies or products. It is not unusual for there to be too much capacity and for companies to have to compete on price in order to sell more.

Cutting back production and merging with other companies is a good way to get rid of extra capacity and give manufacturers some power over how many goods are produced and how much they cost.

9. Bargain Shopping

When it comes to spotting new market trends, large businesses are often slow to react.

This is not happening because people don’t know it’s an issue. The process of mobilizing research and development efforts can sometimes be so complicated that people cannot get their ideas through to the right management level.

The top and bottom levels of a company being aware of the need to grow in a particular direction does not end up in them succeeding in that direction. Being a big business has its drawbacks, one of which is _____.

A big organization needs many levels of management to run smoothly, but this can be a barrier to new ideas.

If you are a research analyst, your supervisor will not be happy if you do research on the side using the company’s resources and time. New products and findings often result from pursuing these types of ideas.

When a large corporation sees a small business with a lot of potential, they will try to buy that company.

This allows companies to avoid the lengthy incubation and trial periods and get access to approved and tested products to launch and sell.

If the company being acquired is of comparable or decent size, this approach is also known as consolidation. It is also known as industry roll-ups.

The company expands its product range by acquiring smaller businesses. Prime examples are Facebook acquiring WhatsApp. The social media company didn’t need to buy the instant messaging app, but it did want a part of the instant messaging app’s profits.