There are at least twenty three practical reasons for a business to acquire another company. In an acquisition, both businesses begin and remain as separate legal entities, with one of the businesses owning the other after the acquisition closes. (In a merger, only one of the companies survives as a legal entity.)
Financial Benefits of Business Acquisition
Access to Capital
There are three ways that a business acquisition can provide more operating capital.
- Increased Borrowing Capacity – The acquiring company may be able to negotiate a higher line of credit based on the increase in combined sales and net revenue, which could support a higher debt service coverage ratio.
- Buying a Line of Credit – In some cases, the company acquired may already have access to a line of credit that is greater than that enjoyed by the acquiring company.
- Buying Cash – In this situation, the acquired company has significant cash and cash equivalents, sometimes more than enough to pay for the acquisition.
- Market Cap and Valuation – The acquisition itself can Increase the valuation and market cap of the acquiring company.
- Increased MRR – Buying a company with enrolled customers can increase MRR (monthly recurring revenue).
There are many tax benefits possible with acquisitions. These will often affect the valuation of the acquired company. Tax benefits can also depend on the form of organization of the acquired company (such as S or C corporation).
- Tax Deduction – Acquisition expenses can help offset acquirer profits during a profitable year to reduce taxes.
- Depreciation – In some cases, the acquired company will have accrued a substantial depreciation expense in the current tax year that can help offset profits in the acquiring company.
Technology Benefits of Business Acquisition
Access to technology drives many acquisitions because advanced product technology represents valuable time, money, and market position, all in one.
- Access to new product technology – Acquiring new product technology can save years of costly R&D time and enable the acquiring company to enter a new market as a market leader instead of an also-ran.
- Complementary technology –Verizon bought the BlueJeans Network, a global conferencing service, in 2020 during the Covid-19 pandemic. Verizon connected BlueJeans’ conferencing technology with Verizon’s worldwide tier-1 carrier network, giving BlueJeans a tremendous advantage over competitors who have to pay wholesale rates for their toll-free and local dial-in numbers.
- Connect nearly-finished technology to a market – In pharmaceuticals, established companies with marketing muscle buy out smaller high-tech companies who have developed innovative new cures and treatments. The established company can use its marketing organization to bring the latest products to market.
Business Acquisition to Gain Talent
Access to Talent
- Development team – Bringing a talented and productive development team on board with unique technology and a reliable dev-ops setup can be an enormous benefit in terms of time, money, and ability to ship products. Technology acquisitions succeed far more often when the original development team is on-boarded with the technology, even when company cultures differ.
- Management team – The addition of motivated top management and employees from the acquired company can revitalize and accelerate business growth. It can also rescue a moribund division and convert the division into a high-margin winner. In other cases, leaders of the acquiring company mentor leadership from the acquired company to maximize the potential of the acquired organization.
- Operations team – Acquisitions succeed more often when the integrity of the acquired operations team is maintained. There are usually critical members of operations teams who know how to work quicker and cheaper. Keeping these individuals and surrounding cast members working together protects the acquisition investment.
- Technical expertise – Some Ph.D. founded companies, in markets as diverse as internet security and bio-engineering, have specialized knowledge, as well as actual patents and trade secrets, that can be invaluable assets for an acquiring company.
- Marketing expertise from the acquired company – Many high-tech start-ups break new ground by marketing and delivering their products and services in entirely new ways that the acquiring company has not yet mastered.
- Marketing expertise to the acquired company – Many high tech shops are incubators for great innovation, established with investment capital to develop high-margin products, but not yet burdened by worldwide marketing and distribution operations. When these high-tech operations are purchased, the acquiring company expects to connect the new high-margin products with its well-developed marketing and distribution teams.
- Legal and financial expertise to the acquired company – Smaller companies often lack administrative resources that might already be available to the acquiring company. Those resources could be legal, financial, HR, or network security, as examples. Sharing these resources to the acquired company can increase the value of the acquired company.
Business Acquisition for Growth
Growth in an Existing Market
- Eliminate a competitor – Buying an existing competitor can eliminate a competitor and help marketing dollars go farther, reducing CAC (customer acquisition cost).
- Market share gain – An acquisition of an in-market provider will immediately increase the market share and “market power” of the acquiring company. In some consumer goods markets, this can provide an increase in brick and mortar shelf space.
- Speed to market – Buying a company for its innovative product can leapfrog the acquiring company from worst to first in some cases by getting a new product to market faster than otherwise possible.
- Customer base growth – An acquisition can bring a substantial addition to the customer base, bring additional market leverage.
Access to New Markets
- Entrance into a new product market – A careful acquisition can gain access to a new market for the acquiring company. Pharma giant Sanofi purchased Principia Biopharma in 2020 for $3.68 billion to get access to Principia’s expertise in autoimmune and allergic diseases and to let Sanofi enter those markets with new products.
- Entrance into a new geo market – Access to licenses and permits owned by the acquired company can enable the acquiring company to enter new markets, either by using in-country licensing to operate in a new country or region or by using export licenses to reach new international markets.
Business Acquisition for Improved Efficiency
Does Synergy Exist?
Synergy was the buzzword of the seventies, but few deals based on synergy produced the hoped-for results. New Age thinking aside, there are valuable business efficiency improvements that an acquisition can gain.
- Complement product or service offerings – A company that makes steel roof decking could purchase a structural steel company that makes girders and supports to provide a full catalog of fabricated metal roofing products for roofing contractors.
- Create cost efficiencies through an economy of scale – Many corporate giants of the 1900s bought smaller companies to develop vertical integration at scale. Ford and Eastman Kodak bought many of their providers to control quality and increase margins. These acquisitions created billion-dollar companies.
- Access to a distribution system – Buying a competitor with a well-developed distribution system can provide reduced costs and greater market coverage.
- Access to production technology or facilities – In this case, the acquired company may have advanced technology in its production facilities that can serve the acquiring company better than its existing facilities. For example, an advanced manufacturing technology that can be reprogrammed for a variety of tasks can be a valuable addition to the acquiring company.
If you are completing an acquisition or a merger, see our story What if You Have to Integrate Multiple ERP, CRM, and Billing Systems.
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About the Author
Bruce Brownlee is a data scientist and product manager with an undergraduate math and engineering degree and an operations research graduate degree with a focus on stochastic processes and mathematical optimization. He’s worked as an industrial engineer, software developer, marketing director, data scientist, and product manager across a broad range of industries where analytical skills are required. His special interests include financial modeling and machine learning applications.