Buying other companies is a growth and expansion strategy that several companies are adopting to become more competitive, have more market share and become more dominant.
In the merger and acquisition space, there are several approaches to merger and acquisition. For the purpose of this article, let’s focus on three of the most popular merger and acquisition approach;
- Horizontal merger and acquisition
- Vertical merger and acquisition
- Conglomerate merger and acquisition
Here is a summary explanation for all the listed types of merger and acquisition;
Horizontal merger and acquisition
This type of merger and acquisition can either be market extension or product extension. Generally, when the acquisition is within the same market or industry, it is called horizontal merger. This types of mergers and acquisition are done as business consolidation strategy. When two companies that deal in the same product in different or separate markets merge to get access to bigger market, this is called market extension merger and when two organizations that deal in products that are related to each other and operate in the same market.
Vertical merger and acquisition
- Vertical mergers may occur between two companies producing different products within the same supply chain for one specified finished products merger.
Conglomerate merger and acquisition
This is the merger and acquisition of unrelated businesses in different or related markets and or industries
Now that you have a general knowledge of the meaning and types of merger and acquisition, here are my three main reason why you should buy a business.
Why it is important to acquire other businesses?
With the knowledge of the types of merger and acquisition, it is clear that any business can decide to merge or acquire another as corporate strategy. The decision to acquire a new business is strictly a board or ceo decision/ and chief among the reason includes;
1. Growth and expansion
As business owners, we all want business growth and seek different approach to the types of growth that we seek. If you are pursuing business growth which includes all of the following; turnover, market share, profit, managerial, investment management, you need to strongly consider buying or taking over other businesses. The companies that should pique your business are businesses that are undervalued,. When you buy these companies, you can quickly turn around this business, break up the acquired company into smaller division and resell at a profit.
2. Defensive Reasons
One core reason why companies buy other companies is for defensive. This is when a company buys another company to protect itself from hostile takeover by competition using the acquisition to strengthen its market position making it more powerful. One defense approach is called Poison Pill Defense, issuing shares to dilute the value of the acquiring shares to ensure a defensive merger. This is to block a competitor, increase market size and share, create or increase the barrier to entry.
3. Financial opportunities
Buying others companies gives you economics of scale. For those that don’t know, it is possible to get loans from banks to buy a business, or you can get crowdfunding to secure more money to buy a business giving equity capital or interest.
There you have it, three reasons you need to understand the why you should position to buy other businesses.
If you need consultation to understand how best to take on this journey of buying businesses, call or mail us, let’s talk about it
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