Introduction
The acquisition happens when a big company acquires a small company. The small company sometimes loses its identity in the process of acquisition.
A merger is the collaboration of two or more single entities working separately on their own comes together to form a single entity for future business opportunities.
Merger and acquisition are two different terms used commonly due to some similarities.
The acquisition is relevant for quite a significant period.
Companies use these acquisition techniques to combat many adverse situations. Companies decide to have acquisition as an option when it is the right time to expand their product line or market share.
The purpose of the acquisition
Entrance in a new market
When a company wants to enter a new market, they have to face problems like existing competition, product loyalty, and many more.
To overcome these issues, companies have to adopt aggressive marketing strategies. Aggressive marketing strategies like heavy advertising increases the cost of the project. This increased cost motivates the organization to take the route of the acquisition.
The acquisition saves a lot on the development of a new product.
A new stream of revenue
Competition is a significant threat to companies’ profitability.
A company dependent on a single or a few products can face the consequences in the future. The acquisition is helpful to add a new stream of income to the companies’ portfolio by adding another product.
Many companies also aim at a new industry for future-proofing purposes.
Costs
The cost of a new product is high. It includes the development and the launch of the product. Return on Investment of a new product takes time, and at the same time, it is typical to analyze the acceptance and sentiment of the market towards the new product.
While in an acquisition, the product is there in the market for quite some time. The market is also aware of the product. The acquisition is helpful to eliminate the risk and the costs associated with the development of a new product.
Increased market share
Companies that opt for an acquisition want to have an increased market share. An increase in market shares helps the companies to have a larger pool of buyers as the current buyers of both the companies are now aware of both the company’s offerings. To increase its market share, Acquiring company target
competitors in the same and related industries.
Companies opt for horizontal, vertical, market extension, and conglomerate acquisitions to expand their firm.
Horizontal Acquisitions
When a firm acquires another in the same kind of business, opting for the acquisition, it is a horizontal acquisition.
The combination of two companies operating in the same market helps increase the market size of both companies.
A horizontal acquisition is also popular among companies that want to use the resources and skills of the other company to have a balance in the organization.
The horizontal acquisition also decreases competition by reducing the number of firms in the market.
Vertical Acquisition
It happens when a company wants to acquire another company in the same industry but at a different level of the supply chain.
It helps them work as a team and reduces the communication gap.
For example:
Lenovo bought Motorola to support their mobile manufacturing unit as Motorola was the first company to design and launch a phone. Motorola is still relevant and going strong with their android phones and, Lenovo also deals in android phones.
When these kinds of companies merge to form a single unit, it helps them to have better planning and coordination.
Conglomerate Acquisition
Conglomerate acquisitions happen when a firm acquires another form with a different business model.
The purpose of this kind of acquisition can be:
Product Extension: It happens when the acquiring company wants to expand its product line.
Geographic Extension: It happens when acquiring company wants to expand its geographical boundaries without overlapping with the acquired company.
Pure Conglomerate acquisition: As the above explanation suggests, a firm acquires another form with a different business model.
Market Extension Acquisition
It happens when companies operate in the same kind of business but a different market.
For Example:
Walmart INC. An American multinational retail corporation bought the highest share in Flipkart(an Indian e-commerce company)
Joint Venture V/S Merger V/S Acquisition
The joint venture is another popular source of starting a new project with two separate entities.
What makes it different from a Merger or an Acquisition?
A joint venture is a collaboration of two or more companies for a project by not creating a single entity but separate entities having their separate ownership.
A joint venture has the requirement of less commitment than a merger or acquisition. The merger or an acquisition aims at holistic growth, while joint ventures aim at a rather specific goal separately for the joint venture.
Choice of whether to go with the merger, acquisition, or joint venture heavily depends upon the motive of collaboration. It is crucial to analyze each aspect before opting for a method.
The joint venture is helpful when the purpose of the collaboration is short-term and very specific for both parties.
While on the other hand, a merger or an acquisition is helpful for a complete turnaround for a longer period.
