Reasons for acquisitions
Companies follow acquisition strategies for a variety of reasons, including:
1) Increased Market Power
A primary reason for acquisitions is that they enable companies to gain greater market power. While a number of companies may feel that they have an internal core competence, they may be unable to exploit their resources and capabilities because of a lack of size. A company may be able to gain the size necessary to exploit its core competence by becoming larger in terms of the size of its market share. And, an increase in market share enables the company to increase its market power. Because of this, acquisitions to meet a market power objective generally involve buying a supplier, a competitor, a distributor, or a business in a highly related industry.
2) Horizontal Acquisitions
Buying a competitor or a business in a highly related industry--which increases the company's market power--provides the company with the size it needs to exploit its core competence and gain a competitive advantage in its primary market. When a competitor in the same industry is acquired, a company has engaged in a horizontal acquisition.
3) Vertical Acquisitions
A vertical acquisition has occurred when a company acquires a supplier or distributor, which is positioned either backward or forward in the company's cost/activity/value chain.
4) Related Acquisitions
When a target company in a highly related industry is acquired, the company has made a related acquisition. Recent evidence indicates that horizontal acquisition of companies with similar characteristics--strategy, managerial styles, and resource allocation patterns--results in higher performance because generally it is difficult to successfully integrate the merged companies.
Companies that are able to gain greater market share or that gain core resources that can be used to gain a competitive advantage have more market power that can be used against competitors. Acquisitions in the pharmaceutical industry provide a good example of companies pursuing market power objectives. While some of these mergers--such as the Merck acquisition of Medco--represent vertical acquisitions to ensure distribution of product lines, others have been either related or horizontal acquisitions to enable the acquiring companies to take advantage of regulatory changes that are challenging the power of pharmaceutical companies. As atrade-off, it is likely that pharmaceutical companies are likely to divert funds from R&D into making and managing acquisitions.
5) Overcoming of Entry Barriers
As discussed earlier, barriers to entry represent factors associated with the market and/or companies operating in the market that make it more expensive and difficult for new companies to enter the market. For example, it may be difficult to enter a market dominated by large, established competitors. As noted earlier, such markets may require: Investments in large-scale manufacturing facilities that enable the company to achieve economies of scale so that it can offer competitive prices Significant expenditures in advertising and promotion to overcome any brand loyalty enjoyed by existing products Establishing or breaking into existing distribution channels so that goods are convenient to customers
When barriers to entry are present, the company's best choice may be to acquire a company already having a presence in the industry or market. In fact, the higher the barriers to entry into an attractive market or industry, the more likely it is that companies interested in entering will follow acquisition strategies.
While the acquisition cost might be high (depending on such factors as attractiveness of the business or market, competing acquisitions, or the cost of integrating operations), the acquiring company achieves immediate market access, gains a brand that has access to existing distribution channels, and may already have some...
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