ACQUISITION AND MERGER

Acquisition and Merger

Acquisition and Merger

Synergy Ramp Up

The key to growth by acquisitions is taking advantages of synergies: making 2+2=5. Growth through acquisition is a quicker, cheaper, and far less risky proposition than the tried and true methods of expanded marketing and sales efforts. Further, acquisition offers a myriad of other advantages such as easier financing and instant economies of scale. The competitive advantages too are formidable, ranging from catching one's competition off guard, to instant market penetration even in areas where you may currently be weak, to the elimination of a competitor(s) through its acquisition (Kaplan, 2006).

Synergistic acquisition is not limited to buying direct competitors. We will also detail how small and mid-size companies can efficiently grow by buying related or complimentary companies. It is quite common for a company to buy another to take better advantage of each other's distribution channels. For example, a candy manufacturer with several retail outlets, might purchase a specialty food mail order company. The buying company could then use the mail order company's distribution channels to sell its candy. If it were a really good fit, it could also offer some of the mail order firm's products through its retail outlets.

Another fairly common type of acquisition involves the purchase of a company in the same industry but in a different geographic area. Internet Service Provider companies, for example often buy ISP's in other regions. Cost center elements like customer service and billing can be centralized to gain economies of scale through the dramatic increase in volume of business.

Few major companies have grown to where they are today without acquiring at least a few companies along the way. Many of the Fortune 500 group of companies achieved membership in that exclusive club by relying on external growth strategies. This is particularly true in rapidly changing industries such as telecommunications and high technology (Kaplan, 2006). Yet successful companies in less volatile industries like groceries, home construction products, and certainly banking often rely on a acquisition to achieve growth, market share, economies of scale, and marketing clout.

The benefits of growth through acquisition are hardly limited to marketing. It is typically easier to finance growth via acquisition than via more traditional routes of expansion. As we'll demonstrate, lenders and investors are more impressed by real financials than with projections based business plans, no matter how positive they may be. Further, a whole otherwise non-existent form of financing is available through the common practice of seller financing. That is, business buyers typically pay some of the sales price over a period of several years, at interest rates below those of bank lending rates.

The catalyst driving many business acquisitions involve synergies. When companies are merged together, the whole is often greater than the sum of its parts. Synergies involving marketing and economies of scale, as pointed out already, are clear benefits. Also, there are typically opportunities involving production, volume discounts in purchasing, and reduced overhead expenses (as a percentage of sales).

Synergies and Economies of Scale Through Acquisition

The benefits realized ...