Business Acquisition: Advantages and Disadvantages

Introduction

The acquisition is defined as the process where the assets or stocks of a company are bought entirely or partially by another company. Companies adopting growth strategies opt using acquisitions rather than expanding the existing structures (Pahl & Richter, 2009). When a company is acquired, the acquiring company may pay the other company in cash or acquire the stock of the company, or the two options can be combined.

Companies may acquire other companies in a hostile or friendly manner. A friendly acquisition occurs when there is an agreement from the two companies. Hostile acquisitions happen when a company is forced to accept selling its assets or stocks to another company (Reed, Lajoux & Nesvold, 2007). In this discussion, I will define and explain business acquisition and provide the advantages and disadvantages of acquisitions in the modern business environment. Acquisitions are of great benefit to a company, and managers should consider taking this as a growth strategy.

Advantages of Acquisition

The acquiring company can penetrate a specific market niche that could not have been penetrated due to many barriers. Companies with the competitive advantage of operating in particular market segments obtain extra benefits for specializing in these segments. Acquiring such companies provides strength in that a company can enter into other markets that could not have been penetrated before (Jarrod Coulhard & Lange, 2005).

The market share of the company increases because the customers of the company are also acquired. The new company expands its product range and can attract more customers. A wide variety of commodities are produced by the company, which provides the company with the ability to expand its operations (Jarrod Coulhard & Lange, 2005).

The cost of operation and production is reduced because economies of scale are achieved. As the company continues to expand its operations through acquisitions, more units are produced, reducing the unit costs associated with the company’s production and operation. New technologies are adopted from the acquired company, which improves the efficiency of production and process in the company (Berry, 2010).

The company’s financial leverage expands because the stocks and assets of the acquired company add to the company’s financial portfolio. Financial leverage is the power gained by a company when more financial assets are acquired. It is notable that when an acquisition happens, the capital base of the company increases. Investment in capital-intensive projects becomes more manageable because there are enough finances to cater for such activities (Berry, 2010).

The company’s overall profitability is improved, and the Earning Per Share (EPS) increases. Due to improvement in productivity as well as increased stock, the company generates more incomes. Shareholders earn more from the company’s expansion, which attracts more investors to buy the shares of the company. Profits are also generated from the company’s diversity of products (Jarrod, Coulhard & Lange, 2005).

Disadvantages of Acquisitions

The cost of acquiring another company can be very high due to the legal expenses and charges of buying the assets of the other company, among additional associated costs. The company must have adequate funds to carry out the acquisition process. In some cases, a company borrows funds to acquire other companies. It may take longer for the company to repay the debts because costs are associated with the debts (Jarrod, Coulhard & Lange, 2005).

The expected profits may not be achieved in the short run because the company has not yet penetrated the new market. There are short term barriers which may hinder the profitability of the company. If the company cannot overcome these barriers, it may be impossible to progress on with normal operations (Jarrod, Coulhard & Lange, 2005).

The opportunity cost of operating acquisition is high in the short run. Opportunity cost refers to the forgone benefits if the company could invest the same funds in another project with higher financial returns. The decision to acquire another company must consider the foregone benefits in the run because if the acquisition does not overcome this cost, it may end up collapsing (Jarrod, Coulhard & Lange, 2005).

The customers and shareholders are affected by the acquisition. When a company is acquired, the management of the entire company is done by other people. The new employees may not know the specific needs of the customers of the company. On the other hand, the shareholders may not be satisfied by the new management, and this may be a threat such that they can opt to sell their shares (Berry, 2010).

Conclusion

Even though acquisitions are advantageous to a company, there are several bottlenecks associated with the strategy. Acquisitions bring benefits to all company stakeholders by generating more profits, expanding the market share, and other benefits. On the other hand, the acquisition is costly to operate; there are high opportunity costs involved in the short run and other drawbacks, which may hinder a company from adopting an acquisition strategy. Generally, acquisitions are of great benefit to a company, and managers should consider taking this as a growth strategy.

References

Berry, A. W. (2010). Advantages and disadvantages of acquisitions and mergers. Web.

Jarrod M., Coulhard, M., and Lange, P. (2005). Planning for a successful merger: A lesson form an Australian case study.’ Journal of Global Business and Technology, 1(2).

Pahl, N. and Richter, A. (2009). International strategic alliances and cross-border mergers & acquisitions. GRIN Verlag. ISBN 3640303296, 9783640303298.

Reed, S. F., Lajoux, A. R. and Nesvold, H. P. (2007). The art of M & A: a merger, acquisition, buyout guide. McGraw-Hill Professional. ISBN 0071403027, 9780071403023.