How can an acquisition accelerate growth?
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If a company’s owner is looking for a way to accelerate growth, then an acquisition might be the answer. The companies may wish to remain as separate entities, or they may merge fully and develop into a single entity. In either situation, entering into a M&A deal to expand and grow the company can help the company to strengthen its market share. In 2013, Bain & Company published their study, which saw them observe company acquisitions over a 10-year period. It was found that share values for companies who pursued acquisitions increased by 25% more than their competitor companies who pursed no acquisitions.
An acquisition can help to reduce financial costs, and the capital saved in one area can be utilised in other areas of the business. If the companies are similar in nature (e.g. if they specialise in the same service or product), then combining the two can bring economies of scale. If the companies specialise in slightly different products, then an acquisition can enable each company to market its own product in the other’s market, which will thus accelerate revenue growth. Combining the two companies also makes way for cross selling opportunities, or revenue synergies; the companies are able to do business with each other’s original clients. These revenue synergies should accelerate the financial growth of the acquirer company.
An acquisition will inevitably allow for growth within the acquirer company, but it will also accelerate growth within the target company. If the target company was not previously performing very well, then its acquisition, by presumably a larger, more successful company will tend to improve the target company’s performance. As costs are reduced, margins and cash flows are improved, and the target company’s growth will mirror that of the investor company. Many private-equity firms have been known to follow this strategy, and some have even seen their operating profit margins increase by an average of 2.5% more than those of their competitors during the same period (Social Science Research Network Working Paper, 2010).
Smaller companies often have difficulty in getting their products to reach the entire market. A larger company might notice this difficulty, and purchase the smaller company in order to use their own large-scale brand to boost the sales of the smaller company’s product. By doing this, growth of both companies are accelerated. Multinational technology company, IBM, has provided a prime example of how multiple acquisitions can lead to mass growth of both the acquirer company and the target company. Between the years of 2002 to 2009, IBM purchased 70 companies for approximately $14 billion, and estimated that revenues were increased by around 50% in the first two years after each acquisition.