Mergers and Acquisitions: Reasons to Buy
Mergers and acquisitions allow a company to skip the growth stage and buy existing sales and profits. For this reason and those that follow, a company may choose to buy other companies instead of relying on organic growth.
Make more money through M&A
Make no mistake: The pursuit of money is a main reason for making acquisitions. Although it may be the most base and crass of reasons, it’s an extremely valid one. Making more money is a noble pursuit. Profits make shareholders happy and therefore keep the vultures from descending upon high-flying executives’ careers.
Gain access to new products and new markets
Acquiring a company with a similar product allows the acquirer to increase its share of the market. Being a larger player in an industry can have benefits, such as the ability to negotiate better prices or terms from suppliers and vendors, increase awareness to customers (larger companies typically are better known than small companies), and raise prices.
Buying a company may also allow the acquirer to introduce its products into new markets, as well as introduce the acquired company’s products into Buyer’s markets.
Implement vertical integration
Vertical integration means buying a supplier or an end user of your product. An ice cream manufacturer that buys a dairy farm is vertically integrated. The benefits may include better pricing (the ice cream manufacturer doesn’t have to pay the dairy farm’s markup) and control of raw materials.
The downside is that the acquired company may service other competitors. If that dairy farm also supplies other ice cream manufacturers, those competitors may balk at buying from their rival. This situation is a channel conflict. (And you thought that was when you and your spouse argue over what program to watch!)
Take advantage of economies of scale
You’re likely to hear this term countless times. Economies of scale simply means that as a company grows larger, the fixed expenses stay the same (or increase far more slowly than the top line revenue). Therefore, the larger the company becomes, the more profitable it becomes.
Buy out a competitor
If you can’t beat ’em, buy ’em! If Company A is killing a Company B in the marketplace, Company B may determine simply buying Company A is the best way to make the competition go away.