The reasons for mergers and acquisitions

 

There are a number of standard reasons given for acquisitions to take place. There are subtle differences in the reasons dependent on whether the acquisition is a merger or takeover but the main categories of reasons are the same. In exam or test questions, you have to strip out the relevant reasons from the ones that are not relevant in relation to the particular case study you are looking at.  In addition, you might be expected to make some evaluative comment about the different reasons - some are likely to be more important or more significant than others. The success of an acquisition in meeting these objectives might also be something that you will have to comment on. It is worth bearing these things in mind as you read through the reasons that follow.

Capacity

Capacity refers to the amount of output that a firm is capable of producing given its existing assets. In theory, firms will have a maximum capacity that they can produce given their capital assets. Acquiring another business might enable it to be able to increase its capacity relatively quickly.

Economies of Scale

Economies of scale are the advantages of large scale production that result in lower cost per unit produced. Economies of scale do not refer to expanding output with existing resources; it is about changing the scale of production. A firm acquiring another increases its scale of operations; it has more labour, more plant and equipment - more of everything!

Economies of scale is not just about the firm expanding its existing capacity but about changing the whole scale of its operations - increasing all factors of production.

Acquisitions cost money - in some cases, millions of pounds, if not billions. It should be clear from this that an acquisition is not going to 'reduce costs' as is often stated by students. What it will hope is that the increase in output that results from the acquisition will be greater than the increase in costs as a result of it. If a firm doubles its costs as a result of financing an acquisition but output rises by 120%, then its average costs - the costs per unit - will fall.

This is what economies of scale is about. Firms gaining economies of scale from an acquisition will hope to use the benefits it gains from lower unit costs to either boost its profit margins or enable it to be able to compete with its rivals more effectively.

Plugging a gap in the market

A business may feel that its product portfolio is not sufficient to cater for different customer needs in its market. Acquiring another firm that is already in that market enables it to plug that gap. It may be the case that a firm has a seasonal sales trend. Buying a business that has its predominant sales in a different season of the year will also be an example of how the firm's product portfolio might be enhanced through a merger and acquisition. The example of Fuller's and Gales is an excellent example of this.

Some products might be associated with particular times of the year - a cold beer is often appreciated in the summer. Acquiring a business which contributes to the product portfolio might be a reason for an acquisition.

Accessing supplies or distribution networks

Some firms develop their business in a particular sector of the production process - primary, secondary or tertiary. An acquisition in a different sector may reduce its reliance on suppliers or give it access to new markets. This can lead to a strengthening of the businesses position and give it a significant competitive advantage over its rivals. It can also mean that it is moving into an area of business in which it does not have expertise so care has to be taken to research the proposed acquisition target carefully.

Accessing technology or skills

A firm may be targeted for acquisition because it has specific skills within its staff or has a particular technology that would be useful to another business. Businesses that are relatively new and might have hit upon a new idea or who have developed specific skills in a certain area might be ripe targets for acquisition.

Tax reasons

Businesses are always looking for ways to reduce their tax exposure. The tax laws in most countries are complex but essentially, there may be less tax to pay if a firm uses cash to acquire assets than if it has cash in hand. If, and this is often the case, a firm has large sums of money lying idle, using these sums to acquire another business that would not only enhance its operations but would also reduce its tax liability may be very tempting for the firm to look for a suitable target for acquisition.

The Stakeholder Model

A stakeholder is someone or some organisation/institution that has an interest in the success of a business. Notice the emphasis in this definition on the word 'success'. Some stakeholder models include competitors as a stakeholder. This definition would exclude competitors because they cannot be said to have an interest in the success of a business. That is not to suggest that other stakeholder models are incorrect - they are merely different to the one used in this article.

The key stakeholders in an acquisition are going to be:

·         Shareholders

·         Management

·         Customers

·         Suppliers

·         Employees

·         The local community

·         The government/regulatory agencies

When an acquisition is announced, there is likely to be conflicts of interest between these different stakeholder groups. The interests of shareholders are likely to be very different to the interests of the firm's employees. One of the issues that a firm considering an acquisition has to ask itself is whether it can make the acquisition work with its existing business. Different cultures and working practices can cause a number of problems, which might stop the merger from delivering the benefits the firm might hope for.  Finding ways of satisfying these competing stakeholder interests, therefore, might be crucial to the success of the merger