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Acquisition Motives for Medium and Large Companies

Updated: Jan 22, 2021

For buyers as well as sellers, there are a variety of motives to sell off an M&A transaction. At this point, motives that can often be found on the buyer side should be discussed.


Mergers and acquisitions activities are often associated with growth strategies. In practice, companies often use mergers & acquisitions in order to obtain certain resources and competencies by acquiring external companies without having to develop them in-house. This enables companies to accelerate their organic growth significantly through external acquisitions. For example, if a target company has unique key technologies or special know-how in the field of research and development, then it can be extremely advantageous for the acquiring company to acquire these resources at short notice rather than to build them from ground up. Another motive for M&A activity can be to secure its market position. By purchasing a competing company, the company could increase its market share and thus expand its own market power.


In many cases, mergers & acquisitions are also used to open up new target markets. This allows a company's presence in a geographic region to be expanded significantly. It would be conceivable that a medium-sized company could rapidly expand its service and sales network through company acquisitions in order to be able to support its customers more comprehensively. The achievement of synergy effects is another important motive for activities in connection with mergers and acquisitions. Here economies of scale and economies of scope are the main drivers for achieving cost synergies. Economies of scale mean cost advantages that arise when the output volume increases while fixed costs remain constant. The fixed costs per unit produced decrease up to the company's capacity limit (fixed cost degression). Compound effects mean cost advantages that result from a greater breadth or depth of the company's products or services. However, this effect can also reverse, namely when the company becomes too complex due to an excessive variety of products or services.


Since M&A activities are often associated with considerable risks, it is essential to carefully analyze synergy potentials before starting any mergers and acquisitions process. With regard to the technological equipment and competence of the target company, it is easy to make a misjudgment. This can result in a reduction in costs through synergy effects that do not occur to the desired extent. Mergers & acquisitions are also often used to expand business areas as part of a diversification strategy. In addition to the more efficient distribution of the available resources, risk compensation and long-term corporate security play a decisive role here, particularly in lateral diversification. Often there is little commonality between the new and old business areas. For example, in the shared use of the administrative structure or financial resources. In addition to the motives listed above, tax considerations have often an influence on many M&A activities too. These examples show that there are a variety of motives for the buying-side of the M&A activity. Additionally, in practice, there is usually not just a single mergers and acquisitions motive, but several motives in combination.


 

Note:
All blog articles are to be understood as experience reports and do not claim to be either correct or complete. Nor do they represent legal and tax advice. They replace in no way an individual advice. The author assumes no guarantee or liability. Use at your own risk.

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