ANALYTICAL REVIEW (VIRGIN MONEY AND NORTHERN ROCK)

Analytical Review (Virgin Money and Northern Rock)

Analytical Report - Acquisition as a growth strategy (Virgin Money and Northern Rock)

Acquisition Strategy

The acquisition strategy is one of the strategic alternatives that companies use to increase their market power, neutralizing competition, enter a new market that offers an opportunity or risk sharing is the result of an uncertain environment. The same motive is behind the acquisition of Northern Rock by Virgin Money. The acquisition is the strategy used by Virgin Money to acquire control, or a 100% interest in Northern Rock, in order to integrate it into portfolio with subsidiary character. By their nature, these operations are transactions friendly, but can also be hostile. According to the researcher, the acquisition of Northern Rock by Virgin Money completely reflects the growth strategy, however, a hostile takeover is another version of the acquisition strategy, in which case the target company does not request never bid for the company that acquires it. Based on a comparison, one can say that acquisitions are more common than mergers and hostile takeovers (which are often combined with a strategy of diversification) as the predominant strategy among companies that are using the entire world. Similarly, acquisition help the two business parties to forget their competitor relation and join hands together to come out of the difficult situation because normally a company go for acquisition when it feels that it cannot come out of the crisis on its own (Stahl, 2003, pp 370). 

Reasons for acquisition

The researcher tried to figure out the main reasons behind the acquisition and realized that one of the main reasons for the acquisitions is to increase the power of the company in the market. Market power arises when a company has the ability to sell their products or services above competitive levels or when the costs of its substantive and support activities are below those of its competitors. The company's participation in the market also affects the degree of power. Therefore, most of the decisions for acquisitions are made for the purchase of a competitor, a supplier, a distributor or a company in an industry that is highly correlated, so that the acquiring company gains a competitive advantage in the market, including the possibility of becoming the leader. Similar situation is in this case where Virgin takes over the Northern Rock, to gain control over the banking sector, which leads to the competitive advantage in the market (Lee Marks, 2006, pp. 479-80). 

Horizontal acquisitions

According to the researcher, the acquisition of Virgin money and Northern Rock is a perfect example of horizontal acquisition. The acquisition of a company competing in the same industry that acquires another is called horizontal acquisition. These acquisitions increase market power because it enables the company to strengthen its strategies of cost leadership and differentiation, thus creating a synergy. The horizontal acquisitions lead to better performance when firms have similar characteristics such as strategy, management style and how to allocate resources. The similarity of these features allows a less problematic integration of the two ...