A go-to-go Business Acquisition Guide

What is Business Acquisition?

Business Acquisition is purchasing a part or whole corporate asset or a target company. Besides acquiring a new company, you can inherit the goodwill and USP. It gives your own company substantial growth. You become the key person in making final decisions concerning the asset. Additionally, you gain more than 50% ownership of the target company.

You must have heard or used ‘Merger’ and ‘Acquisition’ interchangeably. But these words vary. As the name suggests, a merger means two companies merge to become one. Mostly mergers happen to save production costs and also increase their capital to enter a new market. Plus, the merger is a business exit strategy also. To tell the difference between an acquisition and a merger, assess the size difference of both companies. 

For instance, Exxon Corp. and Mobile Corp. merged in 1998, skyrocketing shares and reinvesting dividends. At the same time, Google acquired Android in 2005 for around $50 million. 

The global industry is a mine of such acquisitions and mergers. To our surprise, all business acquisition follows a different type. So, let’s hop on to the various types of it.

Types of Business Acquisition

The four types of widely used business acquisition are:

• Vertical Acquisition

In the vertical model, you acquire another company belonging to its supply chain. For instance, a Baking company buys flour from a nearby wheat mill. So the baking company can reach the whole wheat mill. As a result, flour, an expense, became a revenue source. In the vertical model, both sides’ acquisition is possible. In simple terms, the wheat mill can also buy the baking company to advertise their wheat. As a result, organisations become independent of market trends. 

• Horizontal Acquisition

In the horizontal model, you acquire a company making the same products in your industry. For instance, Facebook acquiring Instagram is a horizontal acquisition. In the horizontal model, you aim to eliminate competition and increase market share. However, a threat of monopoly exists in this model. Therefore, the Federal Trade Commission (FTC) regulates antitrust laws. To stop any company from acquiring all competitors in the market. As a result, the citizens purchase in a free market. 

• Conglomerate Acquisition

When a company buys another company in a different industry, it’s called conglomerate acquisition. The brand names you hear daily, like 3M, Mars, Comcast, etc., are examples of conglomerate acquisitions. This model will protect you from market fluctuations. As a result, even if one industry is running into losses, you still earn profits in others.

• Concentric acquisition 

You and other companies often make different products but serve the same customer. That’s where a concentric acquisition can take place. Suppose you sell cloth material and Mr. X is a tailor. When you buy the service of Mr. X, it is called concentric acquisition. For acquisition concentric, the product and service must be complementary. 

These various business acquisition types have given us widely famous brands. But do you wonder, what is the force behind such an acquisition? Why would Vodafone have acquired Mannesmann? Or why did Russian oil giant Rosneft acquire TNK-BF? 

 

Why do businesses acquire?

Vodafone acquired Mannesmann to create the world’s largest mobile operator. Rosneft acquired TNK-BF to raise one more Russian Oil and Gas industry champion. There are numerous reasons for businesses to take over or acquire another company. 

Primary business acquisition leads to the synergy of business activities. Eventually, it enhances the overall performance. Also, it increases your business efficiency. In acquisition, both companies are utilising the strengths of each other. 

First, it saves you dollars by reducing the costs. Second, By simply buying your competition’s business, you get an opportunity to increase market existence. Third, vertical acquisition eliminates the price of a supplier in production. Last, you can stop your competitor in the same or other industries. 

Do any of the reasons compel you to think of an acquisition plan? Then check out the six business acquisition strategies, followed by actual examples. 

 

Reliable business acquisition strategies with examples:

Most common strategy is to improve the acquired company’s performance. You acquire a target company and thoroughly reduce its cost to grow profit margins and cash flows. It is best suited to private equity firms. Improving a company’s performance with low margins and low returns on invested capital is easy. However, a host of strategies created a history in business acquisition. Check out the following four strategies: 

• Identify winners early and help them grow

You must have a sharp eye and keen observation to use this strategy, as you must identify a new industry or emerging product line before anyone else. Three dimensions to focus on for winning the acquisition game. 

1. A) Willingness to invest before any other competitor recognizes it. 
2. B) Accept that you have to make several bets, and failure of some is inevitable. 
3. C) Develop the skills and patience to grow the acquired business. 

You can also identify an early winner in your industry, as Johnson & Johnson did. J&J acquired DePuy in 1998 and Synthes in 2011. 

• Accelerate Market Access For Products

You may have innovative products and strategies, but you may not have enough funds to build new customer relationships and reach potential customers. Therefore, you can sell your business to a big company. Their sales force will accelerate the market access for the product. For instance, Procter & Gamble acquired Gillette. They individually had a significant market share in different markets. So, both companies introduced their products into new markets and saw revenue growth. 

• Acquire Skills or Technologies 

Suppose you are a technology-based company. However, you lack some technology to improve your products. But you can acquire a company that has that technology. This time-effective strategy saves you from paying royalty payments on patented technology. For instance, Apple acquired Siri.

• Roll Up Strategy

You can use a rollup strategy in a highly fragmented market. You and your competitors are small in this market, attaining across-scale economies. The strategy aims to realize substantial cost savings for the combined entity. For instance, Salesforce acquired Slack following the same strategy. The strategy increases revenue and profit margins than individual businesses,

 

Conclusion

Planning your first acquisition can be intimidating, but with a knowledgeable team backing you, you can confidently make your move. Schedule a call with us to learn how much you can gain from a business acquisition. 

 

-By Dipali Nishad