Why Merge, Acquire or Partner With A Business?
Businesses acquire or merge with other businesses for many reasons. However, a less permanent solution may be to engage in alliances, partnerships or joint ventures, which give rise to similar benefits but also enable parties to retain some autonomy. Below are some of the advantages of cooperation between companies.
- Access To New Markets And Customers: this should facilitate an increase in sales.
- Access To Complementary Resources: organisations can boost their own capabilities. For instance other businesses or partners may possess physical, financial or technical resources, expertise (market specific knowledge), complementary skills, supply chain relationships (for instance access to suppliers and distributors), or networks and contacts that enable firms to circumvent barriers to entry and compete more effectively.
- Economies Of Scope: firms may benefit from collaborations that will enable them to diversify their product range. Selling a greater range of products could attract new customers and consequently increase sales. Bundling products with those of complementary businesses (for instance a mobile phone manufacturer linking with an Internet service provider or the maker of popular mobile games) could also increase the value organisations can offer to customers.
- Efficiency: if organisations combine and enlarge their operations, this could enable them to buy, produce and sell in greater quantities, consequently giving rise to increased economies of scale and thus lower costs. Integrating into the supply chain (by acquiring or partnering with supply chain actors) could reduce external costs. In addition, combining knowledge, expertise and resources could enable firms to increase operational efficiency and thus reduce internal costs.
- Savings: companies could share costs such as infrastructure rent, marketing or research and development.
- Reputation: organisations may influence others' perceptions of their capabilities through gaining external legitimacy, which can in turn increase trust from suppliers, lenders and customers. Linking with an established organisation in a new market (for instance Tesco partnering with Tata in India) may reduce consumer suspicion, encouraging consumers to make purchases.
- Innovation: increasing access to resources and capabilities may foster innovation.
- Competition: forming alliances with, merging with, or acquiring other businesses reduces direct competition in the market. This can increase a firm's market power, which lessens its need to reduce prices in order to compete.
There are however issues that can arise when businesses combine:
- Loss Of Control / Conflict: profits and decisions may have to be shared. Reaching an efficient consensus on decisions may be difficult if the motives or objectives of the parties involved do not align.
- Administration / Costs: coordinating and integrating different businesses can be a complex and thus costly procedure.
- Inefficiency: communication issues may arise if an organisation becomes more complex. In addition, multiple alliances with similar partners may yield fewer benefits than partnerships with differentiated partners.
- Expropriation: a larger, more powerful company may steal customers, expertise, assets or processes and then terminate the agreement. Ensuring intellectual property rights are sufficiently protected can mitigate this risk.
When multiple businesses voluntarily and permanently combine to form one business.
When one business purchases another, either through mutual consent or through a hostile takeover.
Alliance / Partnership
When businesses or individuals with complementary capabilities or resources agree to cooperate in order to advance their mutual interests. For example, the inventor of a product may engage in a partnership with a lawyer, distributor or marketing agency. The parties typically share the costs, risks and rewards.
When two or more businesses agree to pool their resources and work together on a specific task or project, such as the development or launch of a particular product. The parties typically share the costs, risks and rewards.