There are several reasons why a company should make acquisitions. Listed below are some scenarios in which establishing an acquisition program can ensure your company’s continued success.
You may need to strengthen your position in the market if it is expected to have little or no growth or to mitigate competition. You may also want to “jump” into a related market or even venture into a new growing market.
You may decide that it is necessary to increase the size of your business through an acquisition to gain economies of scale. Doing this may allow you to keep up with larger competitors that qualify for better interest rates, access to commercial paper markets, and generally are able to get better terms for financing. By realizing these advantages through an acquisition of another company, division, or product line, one will be able to grow the business faster.
Another issue that some businesses face is that they sell a specialized product line to a limited number of customers. Due to market conditions, these customers in turn “force” the company to accept smaller profit margins. In turn, when suppliers see the company becoming less profitable they are less inclined to offer favorable terms for payment. Meanwhile, larger competitors that sell to a more diverse customer base or sell a broader array of products are not affected by these problems. The acquisition of another company is a viable option to expand the customer list or product line and avoid these problems.
The challenge is ultimately to understand how your company is positioned in the market and visualizing how you would like to position it in the future. It is important to accurately identify your company’s strengths and weaknesses so that you can eliminate or mitigate the weaknesses and enhance your strengths through an effective acquisition program.
