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The Types of Successful Acquisitions

Companies spend millions of dollars on acquisition but only a handful will succeed. How to choose the successful acquisitions’ type?
August 19, 2022

Like any other business process, acquisitions are not inherently good or bad. Acquirers must have well-articulated value creation ideas going into each deal for them to be successful. In expert’ experience with really successful acquisitions there’s usually one specific reason why an acquirer did it. But if things aren’t clicking then the logic might change depending on what type of company you’re looking at – whether its international scale (for example), filling gaps in your portfolio etc. There is no “magic formula” here: every prospective buyer will have their own unique set/archetype which defines how this transaction fits.

 

Improve the target company’s performance.

One of the most common ways to create value in an acquisition is by improving performance for target companies. You can buy them at a discount, take steps towards accelerating revenue growth and improve margins through cost-cutting measures – all which will lead you toward increased cash flows down the road. This strategy has been pursued successfully by some private equity firms as well.

The average operating-profit margins of successful private equity acquisitions in which a target company was bought, improved and sold without any additional mergers along the way grew by about 2.5 percentage points more than those at peer companies during that same time period – meaning many deals increased these numbers even higher.

 

Consolidate to remove excess capacity from industry.

There are times when an industry’s maturity means that it has more than its fair share of production. The combination can lead to excess capacity, which is not only expensive but also provides little benefit for those who own the business because they’re selling at a discount anyway. In the same time competitors stand still or even improve their position in relation to yours thanks just to them having less inventory on hand – and this happens without any action taken by these others against whom you compete.

 

Accelerate market access for the target’s (or buyer’s) products.

In some cases, it can be difficult for smaller companies with innovative products to reach the entire market. For instance IBM has found that pursuing this strategy in its software business substantially accelerated revenue growth of acquired businesses. So in 2010-2013 they acquired 43 businesses on average for 350 million dollars each and by pushing these newly bought out items through its global sales force it estimated that this accelerated revenue up 40% within two years’ time.

The acquisition of Gillette by Procter & Gamble gave them an advantage in emerging markets. They were able to introduce their products much more quickly because they had stronger sales there beforehand, while other parts saw better growth from collaboration between the two companies than either would have achieved on its own.

 

Get skills or technologies faster or at lower cost than they can be built.

In an increasingly competitive market, technology-based companies must take every opportunity they can get to stay ahead. Buying other firms with proprietary technologies gives them access and control over the newest innovations before your competitors do. So you not only have a chance at beating them but also gaining valuable information from these transactions that may be useful in future projects as well.

Apple has spent a lot on acquiring new technology to enhance their products. For example, in 2014 they bought Beats Electronics and Siri (the automated personal assistant) which allowed them take advantage of two different industries while still remaining innovative with innovation capabilities that range from music streaming services through speech recognition technology all over again.

 

Exploit a business’s industry-specific scalability.

It is important to be aware of economies-of scale when purchasing or merging companies. The key factor in determining whether an acquisition will lead you down the path towards lower unit costs depends on if both parties are already operating at a large enough level before combining their operations together. Otherwise this may not happen as expected and result into wasted resources for all involved businesses.

Economies of scale are a great way to save money, and they’re especially useful when the unit cost for an acquisition is high. This can be seen in auto companies who want as few platforms or models that need development – so they’ll only develop one big car platform instead of many little ones like before. For example: The VW Toureg, Audi Q7 & Porsche Cayenne share some common components because all three utilize this single base model which was first introduced at launch time.

Some economies of scale are found in purchasing, especially when there’s a small number or buyers with differentiated products.  While this can be an important source for acquisition value creation it is not very common to find generic savings from back-office functions like these enough on their own alone justify an acquisition.

 

Pick winners early and help them develop their businesses.

This is a great way to invest in something before it becomes popular and valuable.

Johnson & Johnson has been on the forefront of innovation for decades. In order to stay ahead, they make early acquisitions in industries that are about ready or just breaking out into open markets – this allows them time before others recognize its potential growth rate and purchase these same opportunities themselves. One great example is DePuy Active Release Technology which was bought back when it only had $900 million worth of revenue – by the 2010 its revenues had grown to $5.6 billion.

To be successful in this acquisition strategy, you need to have an open mind and invest early. You also can’t expect that any one bet will work out – it’s important for management not just focus on their most likely success but prepare themselves by trying multiple ideas as well.

 

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