Undertaking mergers and acquisitions have become an integral part of boardroom business strategy, for many companies. Entrepreneurs are taking a pragmatic view of market challenges, business growth, operating costs, access to resources and thereby including M&A (Mergers and Acquisitions) as part of their business plan to achieve the desired goals.
Below are some of the key reasons for undertaking M&A:
- To expand into new geographies
The world is shrinking, with every passing day. Entrepreneurs are looking to take their businesses global. But it is not easy to setup a company, hire the right team, setup processes in line with local practices and regulations, develop a sales team and then collect monies on time from customers. It takes a significant amount of time, effort and costs; leaving aside iterations to get it right. Acquisitions could help companies in quickly entering a geography, and leveraging respective business strengths in growing the same further, rather than starting from scratch.
- To add complimentary service offerings
As an entrepreneur, once you have built a business in a particular segment or vertical, it is comparatively easy and quick, to offer complimentary services. Moreover, it is far easier to cross sell services rather than develop a new set of customer base. But to build a scalable business that delivers high quality services, it takes time. However, with the right acquisition, you could immediately begin cross selling, and thereby quickly scale up the business to newer heights.
- To save costs, with forward/backward integration
Assuming your net profit margin is 10%, then every dollar you save on costs effectively means not having to generate additional 10 dollars in sales. Moreover, in several businesses, the customer is very sensitive to pricing and therefore the only option to improve profitability is by reducing costs. And these savings could be quickly generated, if an appropriate acquisition is done keeping forward/backward integration in mind.
- To acquire Technology / IP / Rights that can accelerate the ‘Go To Market’ strategy
If your ‘Go To Market’ strategy requires some technology or special rights, or some IP or specific know how, then to accelerate the same as well as to beat the competition, acquiring a suitable business could be a good strategy.
- To acquire market share
To undertake a quantum leap in the market share, undertaking an acquisition is inevitable. Further, as you acquire a larger market share, you could spread your overhead costs across a bigger business base. And thereby generate economies of scale.
- To gain from valuation arbitrage
Valuation arbitrage happens when your business garners higher valuation multiples, as compared to those of the acquisition target. In such a situation there could be a significant value creation opportunity by undertaking synergistic acquisitions.
- To gain access to capital
It is generally easier to raise $10 mn vs. raising $1 mn in funding; and similarly easier to raise $100 mn as compared to $ 10 mn. There are multiple factors and reasons behind it. But to undertake such a large fund raise, you need to have adequate business size that can consume so much of capital. And that can be achieved in a short span of time only through acquisitions.
These are some of the key reasons for undertaking M&A activity. However, before undertaking an acquisition, it is extremely important to plan and strategize this well. The advantages to undertaking an acquisition can be availed only if the transaction is done correctly, keeping all factors in mind. Do ensure you have the right team helping you in your M&A journey. That is the starting point.