This article has been written by Surya Rose Thomas pursuing the Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho. This article has been edited by Amitabh Ranjan (Associate, Lawsikho) and Dipshi Swara (Senior Associate, Lawsikho).
“If you can’t build it, buy it!” This has become a slogan in the business world today. Million-dollar Merger and acquisition transactions happen every day. We witnessed the latest merging of Vodafone and Idea into ‘Vi’ with our eyes wide open as these telecommunications companies are very popular and their competition often resulted in us enjoying various offers. This corporate marriage can be considered as a result of the arrival of Reliance Jio to the competition in the telecommunications market in India. This merger aims to utilize the synergy and increased customer base followed by less competition as one competitor is out from the telecom market. There are various kinds of acquisitions. Some of them are Concentric Acquisitions, Vertical and Horizontal Acquisitions, Conglomerate Acquisitions, Asset Acquisition, Stock Acquisition, etc. This article discusses the different acquisition strategies. First, let us understand the meaning of acquisition strategy.
What is an acquisition strategy?
The strategy adopted by an acquiring firm to reap profit from the acquisition is called the Acquisition strategy. An efficacious acquisition can only give the desired results. Therefore, a constructive acquisition strategy is pertinent to any acquisition. There should be an explicit rationale for the acquisition strategy. Though companies ultimate motive is profit-making, no company resorts to an acquisition without knowing how to make a profit.
For example, Company A has a successful business in a single product line in various parts of India. Company A decides to increase its product line to make more profits. Instead of building a manufacturing unit of its own and being hesitant to enter a new market, it identified Company B which is an established manufacturing Company focusing on multiple product lines. Company A acquired Company B. Here, the acquisition strategy is increasing the product line. Company A now has the synergy and it will now reap profit in a planned manner.
Given below are some of the crucial acquisition strategies:
- Developing target company
A company may acquire an ailing company if it believes that acquiring and pushing it to development by giving some ingredients can do the job. All it needs may be support from the big company and capital. They may wind up because of the lack of reserves. Such companies get acquired by big companies due to their potential and likelihood of success in the future.
- Market access
What is more convenient; building and establishing an industry in a new market or taking over an already established industry? Of course, we all love shortcuts. Starting from scratch is indeed a tedious journey. Companies acquire to enter a new market. Acquiring an already established company helps it to get the assets, customers, etc., of the target company.
On the other hand, some companies may find it arduous to enter a new market even with an innovative product as they may not have customer relationships and cannot confront risks and losses. Such companies are acquired by big ones.
- Easy access to technologies
Imagine Company A manufactures parts of mobile phones. It has now decided to manufacture its own newly designed smartphone. Company B is a company developing Operating Systems that work on phones. Company A finds it expensive to develop software, operating systems, and all the technologies necessary for creating a smartphone. So it decides to acquire Company B. This acquisition enables Company A to access the technologies of Company B at a lower cost.
- Economics of scale
How about producing more at a lower cost? Sounds great, right? That is Economies of Scale. Attaining high economies of scale is another strategy of acquisitions. The Cost of production becomes cheap, when costs get extended to a large number of goods.
So acquisitions lead to an increase in business, and that results in economies of scale.
- Acquire start-ups
Understanding the value of an innovative product of a start-up and its potential to emerge as a successful company and therefore acquiring it in advance would be a smart business decision and another strategy too.
There are high potential companies, mainly start-ups which require immense capital for expansion. Acquiring them early can yield benefits in the future.
- Eliminating competitors
Some Companies acquire with the strategy of eliminating competitors. The acquisition of Uber eats by Zomato is one latest example of this. Indian food delivery start-up Uber eats was acquired by Zomato aiming for competitive benefits. Gaining more market share than its competitor Swiggy by eliminating its other competitor from the market is the strategy of acquisition of Zomato. Such kinds of acquisitions characterized by the elimination of competitors are called Horizontal Acquisitions or Related Acquisitions.
- Talent strategy
Some acquisitions get initiated in the hunt for talented employees. Humans are indeed a prominent resource. Bringing a brilliant team on board results in enormous profits and innovations to the Company.
- Cheap acquisitions
A Company may acquire another company if it could be bought in a value that is much lower than its intrinsic value. Such situations are rare.
A company diversifies the goods and services to bring down the element of risk factor. The acquisition helps in diversification and this is another common strategy of acquisitions. Such kinds of acquisitions that acquire other companies carrying business in other product lines are called Conglomerate Acquisitions.
A strategy that is common in all other strategies is the Synergy Strategy. The Combined Effect of potential, resources, and talent of both countries can result in more productivity. Sometimes, the growth of business due to synergy results in a reduced cost of production. This strategy is, therefore, the most admired.
- Exploring foreign markets
To start a subsidiary company in a foreign country is risky. It would be wrong to start a company from scratch when there is an option for acquisition. Operating a company in a foreign nation requires a thorough understanding of the foreign country’s economy, tax laws, nature of the market, consumer behavior, demand, business laws, and many more such factors. Therefore, acquisition of an already operating company is preferred since it gives the benefit of its brand, customer base, employees with knowledge of the economy, etc.
- Departure from traditional ways
We are living in a technology-driven era. Living with traditional usages may hamper our growth. A simple example is the usage of Whatsapp for sending messages instead of letters.
A bank with all the latest facilities like net banking, mobile banking, etc., is preferred over banks that stick to traditional ways of banking. Customers may leave such banks. Similarly, acquisitions happen for departing from traditional means. A Company may acquire another one for utilizing the technologies and all the latest facilities of the Target Company including the highly talented qualified and updated employees. This is another strategy.
Example of a successful acquisition
Google’s acquisition of Android
The acquisition list of Google is enormous. The smartest move of Google which was until then recognized as a search-engine company, operating on personal computers, happened in 2005 when it acquired Android. Android and Google are the prominent celebrities of the technology-driven modern world. Android started as a very small start-up in 2003 aiming to provide Operating systems in Digital Cameras but this plan was later shifted to phones as the market for Digital Cameras fell. Google acquired Android for $50 Million intending to expand its platform to Mobile phones.
Today, Android as an Operating System is not confined to mobile phones but can be seen in smart-watches, laptops, smart TVs, tablets, Personal Computers, and even more. There are more than 3 billion active Android devices. Would the splendid growth of Android be possible, if Google had not acquired it back in 2005? Well, we can’t comment on that. However, Google made the right acquisition and this acquisition brought Google to the upfront.
The advantages of Google’s acquisition of Android can be listed as follows:
- Expansion of business into more platforms.
- Huge turnover.
- Vast customer base.
- Utilizing the effect of synergy for best outcomes.
- Access to highly talented employees of Android.
Examples of unsuccessful acquisitions
Microsoft acquired Nokia in 2014 and the acquisition strategy was to enter into the mobile making business. Unfortunately, this turned out to be unsuccessful, with Microsoft burdened with an almost $8 billion loss. Microsoft hired many employees of Nokia but could not still survive in the mobile market.
A similarly failed acquisition was made by Google in 2012 when it acquired Motorola for $12.5 billion. The acquisition strategy was to develop Motorola into a powerful competitor to Samsung. But that did not happen, and ultimately Google had to sell Motorola to Lenovo for $2.91 billion!
Now we know the main strategies of Mergers and Acquisitions. It is reasonable for a Company to engage in acquisitions for various strategies. Expansion of business is the key to success and acquisitions play a significant role here. But not all of it results in profits. Only a few are lucky. The Harvard Business Review report reveals that the failure rate of Mergers and acquisitions is between70% to 90%. This can be due to improper and ineffective acquisition strategies and failure in planning. Sometimes the synergies may not work the way the companies wish. However, a well-planned acquisition strategy is always better than blindly jumping to acquisitions.
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