When to growth through acquisitions?
Growing a company through acquisitions is a suitable alternative to organic growth if the goal is to accelerate the growth pace. However, acquisitions involve higher risks compared to organic development. For a transaction to be successful, it requires a well-prepared acquisition strategy and the right timing: the parent company should be financially strong, and the suitable target should be available on appropriate terms.
Added value. When adding 1 + 1, the sum must be greater than 2. Any company can grow organically – by entering new markets, expanding the product portfolio, optimising processes and increasing capacity. If step-by-step gradual growth is not enough, an acquisition can be considered, what usually helps achieve the set goals more quickly.
New market. In situations when entering a new market is troublesome due to protectionism or barriers to entry, acquisition of an existing market participant provides the opportunity to kick-start activities immediately. A new market can mean a new geographic location as well as new products or sales channels.
Securing the position. This implies horizontal integration, in which a competitor company is acquired. The goal of the transaction may be to dramatically increase the market share, secure resources, or expand the brand or product portfolio.
Securing the value chain. This implies vertical integration, in which a company is purchased that would provide a product or service strategically needed for the acquirer’s value chain.
Realisation of synergy. Market consolidation has several positive aspects, including cost synergies arising from the economies of scale. If you buy a company operating in the same industry, you can allocate overhead expenses to a larger number of units, which usually implies savings for logistics, storage, personnel and other operating costs.
Creating a conglomerate. Sometimes investments are made in businesses that have no connection with existing activities. This is done for the purpose of diversifying the sources of income. This strategy is typically pursued by strong companies that have consolidated their position in the main industry and want to invest some money from making diversified investments.
Map the risks
For the set goals to be achieved, any acquisition transaction must be followed by strategic integration. Each integration plan is unique, and all challenges cannot be predicted. Realizing a synergy from consolidation can trigger unexpected costs, challenging the prepared business plan. If the acquisition has been financed by debt, any sort of drawback or delay in performance can have serious impact on the parent company.
Map the transaction terms
The main transaction terms include its structure, mitigation of risks associated with the deal and the price. The availability of financing packages and the cost of capital should also be carefully considered by the acquirer.
Price. The best possible time for the purchase of another company is during a period of economic downturn, or the end of the bear market; however, waiting for this period in the economic cycle can take too long and it is obviously difficult to identify. At the same time, while corporate valuations are normally the best during the bear market phase, the availability of financing as well as the cost of capital is usually the best in the bull market.
Timing. Purchases should be made when the company is ready for active expansion – both in terms of human resources and existing business lines.
Structure and terms of the transaction. The structure and terms of the transaction can mitigate the risks involved in the transaction. For example, it is important that the company acquired maintains all of its existing contracts and cooperation relations; thus, a proper transfer mechanism should be agreed upon. If it turns out that there are unnecessary assets or hidden deficiencies in the company, the buyer can require their elimination within the agreed time frame. The fulfilment of such conditions may also be linked to the payment of the purchase price. The purchase price does not have to be fully paid at the closing of the transaction.
Availability of financing and cost of capital. Any sort of capital carries its own cost and terms, irrespective of its source. Capital raising cycle depends on the economic environment, industry developments and established risk policies. As a rule, there is more funding available in a growing economicy, which ensures better availability as well as lower cost of capital.