When it comes to corporate growth and expansion, acquisition is one potential strategy many managers and professionals consider.
It’s a frequent topic of conversation in business circles: what is acquisition? How do acquisitions happen?
What are the pros and cons associated with this kind of strategic maneuvering?
In this blog post, we provide an overview of the different types of acquisition with examples as well as some useful insights into the process so you can make informed decisions about what could be best for your organization.
Keep reading to learn more!
What is Acquisition?
Acquisition is the process of obtaining control of a company, or part of a company, either through purchasing it outright, or through making an equity investment.
The acquiring company is called the acquirer, while the company being acquired is referred to as the target. Acquisition can be done in many different ways and for various reasons.
Both acquisition and merger are often used interchangeably but merger and its types of merger in business is totally different from acquisition.
Why do Acquisitions Happen?
Acquisitions happen for a variety of reasons. Companies may want to acquire another company to expand their market share, increase their product offerings, or bring in new talent.
Acquisition can be a great way to expand your market, increase product offerings or even bring in new talent.
One of the other main reasons why acquisitions take place is to gain access to resources that would be difficult to acquire independently. This includes access to technology, intellectual property, and other resources that can accelerate growth or increase efficiency within an organization.
Acquisitions can also give companies access to valuable customer bases and networks, allowing them to expand their reach quickly
Types of Acquisition with Examples
Acquisition is a complex process and there are several different types of acquisitions that businesses can use to achieve their goals. Following are the details of common types of acquisition with examples.
1. Vertical Acquisition
Vertical acquisition is a type of business merger or takeover in which an acquirer purchases a supplier (or customer) of the target company. This type of transaction can be beneficial for both parties as it allows the acquiring company to control the supply chain and reduce costs, while allowing the other party to gain access to resources they previously lacked.
For example, a clothing manufacturer may vertically acquire a textile company that supplies them with fabric. By doing so, the clothing manufacturer gains more control over its supply chain and can potentially lower its costs by reducing its dependence on third-party suppliers. Additionally, it may allow the clothing manufacturer to improve its product quality and differentiate itself from competitors by having greater control over the fabrics it uses.
2. Horizontal Acquisition
Horizontal acquisition is a type of business merger or takeover in which an acquirer purchases a company that operates in the same industry, offering similar products and services. This type of transaction is often used to increase market share, expand the range of products and services offered, reduce competition and diversify resources.
A recent example of horizontal acquisition is the acquisition of Slack by Salesforce in 2020. Salesforce, a leading provider of customer relationship management (CRM) software, acquired Slack, a communication and collaboration platform.
This acquisition was horizontal because both companies were in the same industry, providing software solutions to businesses. By acquiring Slack, Salesforce expanded its portfolio of products to include a communication and collaboration tool that integrates with its CRM software. This allowed Salesforce to offer a more comprehensive solution to its customers and compete more effectively with other software companies such as Microsoft and Google
3. Conglomerate acquisition
Conglomerate acquisition is a type of business merger or takeover in which an acquirer purchases a company that operates in a different industry than the target company. This type of acquisition is often used to diversify economic risk by obtaining access to multiple markets and resources, while also allowing the acquiring company to leverage its existing knowledge and experience with new resources.
A real-life example of a conglomerate acquisition is Amazon’s acquisition of Whole Foods in 2017. Amazon, a leading e-commerce giant, acquired Whole Foods, a high-end grocery chain. This acquisition allowed Amazon to enter the grocery industry and expand its retail operations beyond online sales.
Although Amazon and Whole Foods were in different industries, the acquisition provided Amazon with several benefits. For example, it allowed Amazon to leverage Whole Foods’ physical stores to expand its reach and offer customers the convenience of online ordering and in-store pickup. Additionally, the acquisition gave Amazon access to Whole Foods’ loyal customer base and allowed the company to offer additional services, such as grocery delivery and pickup, to its Prime members.
4. Congeneric acquisition
Conglomerate Acquisition is a type of business merger or takeover in which an acquirer purchases a company that operates in a different industry than the target company. It can enable the acquiring company to leverage their existing knowledge and experience with new businesses, while also allowing them to diversify economic risk by obtaining access to multiple markets and resources.
A real-life example of a congeneric acquisition is the acquisition of Nest by Google in 2014. Google, a technology company, acquired Nest, a company that produces smart home devices such as thermostats and security cameras. Although Nest and Google were in different industries, the acquisition was congeneric because both companies were focused on developing innovative technology products that improve people’s daily lives.
The acquisition allowed Google to expand its offerings into the emerging market of smart home technology and leverage Nest’s expertise and products to develop new applications and services. For Nest, the acquisition provided access to Google’s vast resources and distribution channels, which helped to accelerate its growth and reach more customers.
Benefits of Acquisitions
Standard benefits of business acquisitions are:
Increased market share
Businesses may acquire other businesses in order to increase their market share. This can give them a competitive advantage by allowing them to expand their product offerings and reach more consumers. Additionally, it can help reduce competition and improve efficiency within the organization.
Businesses also benefit from a reduced cost structure as reliance on external vendors for production and services is diminished. Moreover, the larger companies can benefit from economies of scale in terms of costs related to such things as labor, materials, or services due to their larger operations. All in all, business acquisition leads to reduced competition within the industry which allows the company acquiring rivals to benefit from greater market share in that field.
Acquisition of different resources, from raw materials and energy to facilities and intellectual property, can benefit a company in at least two distinct ways. First, diversification lowers the vulnerability of an organization by making it less dependent on any single resource. Without this cushion, an outage or disruption to any single source could create significant damage.
Second, a wider resource range provides companies with more options when considering strategies like controlling costs, increasing efficiency, and entering new markets; all of which can be instrumental in driving growth and creating additional value. Therefore organizations should focus on diversifications during their investments as the benefit is two-fold: lower risk and higher opportunity.
Improved access to customer bases
Partnering with other successful companies and gaining access to their loyal customer bases can be of great benefit to a business. Not only does the acquisition open up new avenues of customers but also potentially a larger network that can help support that company’s growth. With these access points, companies will have increased potential to make more profit through creating loyal relationships with customers who come from an already established fan base. Ultimately these opportunities benefit the acquiring company while allowing them to benefit a pre-existing network as well.
Increasing efficiency and accelerating growth are both valuable objectives for any business, though depending on the situation one or the other can benefit the company more. For example, if a company has limited resources and is looking to maximize their output, then increasing efficiency is recommended. On the other hand, if a company wants to broaden their customer base, then accelerating growth through market expansion via acquisition is suggested.
Disadvantages of Acquisition
The disadvantages of acquisition can be considerable, and include
The disadvantage of an acquisition between two companies that lack compatibility is undeniable. Despite the potential for improved efficiency and economies of scale, the lack of agreement on a cohesive strategy and direction can create disruptions in operations and weakens the competitiveness of both organizations.
Additionally, misalignment between cultures, values, and core competencies can result in ineffective mergers or acquisitions as well as lower employee morale, engagement, and cross-department collaboration.
Operating systems and processes have grown increasingly complex in recent years, creating both advantages and disadvantages for businesses. The main disadvantage of that complexity is the number of challenges businesses can face when trying to integrate systems and processes during an acquisition. In addition to having to move data between disparate systems, there’s also language interoperability issues as well as cultural differences in certain cases which must all be navigated carefully if the acquisition is to succeed. All in all, operating complexity may bring a range of benefits, but it also presents unique problems that need a considered approach if they are to be surmounted.
An oft-overlooked disadvantage of acquisitions is the high costs associated with integrating two different organizations. On top of the up-front costs for the acquisition itself, businesses must account for the expenses associated with harmonizing their operations, personnel, and technology. Integration can become especially costly if there are discrepancies in operating systems, untrained staff, and/or a lack of resources. As such, organizations looking into mergers and acquisitions must be mindful of these potential integration costs before embarking on ambitious corporate strategies.
One disadvantage of an organization acquiring a new business is that it can result in decreased morale among existing employees. Workplace transitions, especially during an acquisition, can result in restructuring and changes to jobs and duties that may create doubt or uncertainty among current staff members. Management must work diligently to ensure employees are aware of the value they bring to their organization and remain supportive throughout the adjustment period. Identifying existing employee strengths and nurturing relationships by communicating updates and providing feedback is crucial for fostering positive company morale during the transition.
Duplication of sources
Acquisitions can be a great way for companies to expand their markets or acquire technical skills, but they can disadvantage employees. When a company acquires another, merged roles from the two organizations often mean employees may end up doing the same tasks as each other, leading to redundancies and disheartened teams. It’s important when performing an acquisition to make clear which positions will need more support after the merger and consider how well existing employees fit into those positions. Failing to do so has consequences on the morale of those who may find that their previous hard work is suddenly being duplicated by someone else.
When a company acquires another, they need to be aware of the potential disadvantage that arises from conflicting corporate cultures. This can have a detrimental impact on both employees and business operations. If the newly acquired company has established procedures that differ significantly from those of the acquiring company, it can create difficulty in not just operations, but motivation and engagement with staff as well as interpersonal dynamics within teams.
Furthermore, for a successful acquisition process, transitioning existing policies and traditions suited to the target company may prove difficult; leading to unavoidable complications and requiring an appropriate strategy for managing new cultural complexities.
There are many takeaways after learning types of acquisition with examples. It is important to consider what type of acquisition is most relevant for your company in order to maximize the benefits and minimize the risks. We can help you identify the most advantageous type of acquisition for your business and provide guidance on how to execute it successfully. Contact us today to learn more about our services.