The 10 Biggest Reasons to Pursue M&A

What is an Acquisition?

An acquisition is  a transaction whereby companies, organizations and/or their assets are acquired for some consideration by another company.

Managers involved in large M& A deals usually are quite willing to disclose their motives whenever a large transaction is announced. This is to justify the spend to their shareholders and the general public. It gives insight into the thought process behind the deal.As a data room service providers, DocullyVDR helps several intermediaries involved in the deal and is used in the transaction.

The 10 biggest motives with some examples have been provided below to give context to each specific motive.

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10 reasons for companies to acquire or be acquired include:

Motive 1: To Acquire New Technology or Expertise

Industries change and companies also need to evolve to survive , if not, they don’t survive. That’s why companies look out for companies which give them new technologies and expertise. In the future, as the energy transition continues, many of the oil and gas majors will begin investing in renewable energy firms, for example.

Examples:

Google has acquired over 30 artificial intelligence (AI) startups, acquiring a range of capabilities in a technology which is set to give them a head start in the future. The acquisition of Android in 2005 for $50 million, enabled Google to enter the cellular phone market for the first time.

This acquisition was a huge success as in 2020, the Android operating system was the operating system operating in over 70% of the world’s mobile technology, and this figure is only increasing day by day.

Pfizer acquired Warner-Lambert for $ 90 Billion

Economies of Scales:

The thinking and philosophy behind most M&A deals are that Bigger is often better because it fulfills the economies of scale motive. Bigger corporates enjoy cost savings and competitive advantages that smaller companies usually don’t.

Examples:

 British Airways has merged with a few different firms over the years to create IAG (International Airlines Group), essentially a conglomerate of airlines which has the largest control over the skies than almost any other airline company.

Motive 3: Larger Market Share

Market share is the most common and obvious reason for most M&A transactions. Companies are constantly looking at where they stand in their industries as compared to their peers and competitors, so acquisitions keeping the market share in mind are never far from the thoughts of CEOs.

Of course, one drawback is that too much market share or larger market share attracts the ire of antitrust organizations.

Examples:

Every big and major retail bank has grown in size through the acquisition of smaller regional retail banks, giving them a power which famously makes them ‘too big to fail’.

Motive 4: Value Creation by Synergies

Generally the scale of synergies is too often considered an exaggerated concept. But sometimes, this logic, if not the numbers, makes absolute sense. In 2017, when Amazon acquired Whole Foods, it was a clear attempt for Amazon to harness the power of its e-Commerce business to traditional food retail.Clearly, it was a successful move as within a few hours of the deal, most other food retailers in the US were down by a few percentage points.

Another example is that of Morgan Stanley’s acquisition of E*Trade could be considered a synergistic acquisition or an acquisition aimed at acquiring technology, as there is considerable overlap. The $13billion deal allowed Morgan Stanley to tap into $56 billion of low cost deposits, data about millions of E*Trade’s customer base, and a powerful new tool to add to Morgan Stanley’s existing portfolio.

Motive 5: Geographical Diversification

Another huge value-driver for decades in an M&A deal for businesses has been Geographical diversification:

The logic is simple why build a company from scratch in a foreign country or a new terrain, when you can acquire an already cash generating existing entity and use it as a launchpad for your own company’s growth in that country? This is called the roll-up strategy

Examples:

Habyt, biggest European co-living company, became the largest co-living player worldwide after it acquired Hmlet, the biggest Asia Pacific player in communal living. Another notable and most successful example is that of the Spanish bank Santander. Banco Santander didn’t let Spain’s relatively small population of less than 40 million people at the time its acquisition spree began, to restrict its growth prospects.

It looked to the Latin American and later, European markets, where its cultural and economic links gave it an advantage.It acquired banking chains in 9 countries outside of Spain to become one of the world’s largest retail banking institutions.

Motive 6: Vertical Integration

When a company acquires different parts of the value chain in its own business it is called Vertical integration. Typically, it could begin with a company which has grown to a substantial bigger size buying its own distribution chain so that it doesn’t have to hire a third party distribution company.

Examples:

A good example of vertical integration was LiveNation’s acquisition of Ticketmaster in 2010, where it acquired Ticketmaster’s retail distribution.

Motive 7: Cross-selling

Another popular and powerful way to achieve revenue synergies is by Cross selling. The thought that two companies have more to offer their customers by being together leads to their M&A.

Examples:

Starbucks’ acquisition of Teavana for $750 million in 2017. There couldn’t be a more synergistic idea for increasing revenues than selling tea and coffee together Now, both are winners as you can get tea at Starbucks and coffee at Teavana.

Motive 8: Taxation

Unsurprisingly, tax is one area where companies are not prepared to admit that they’ve entered an M&A deal to avoid taxes.

It doesn’t reflect well with customers knowing that a company is openly avoiding taxes but be assured: this is one of the most common, but least mentioned explicit motives for M&A. The idea is that a cash flow positive company acquires a firm with carry forward tax losses to reduce its own tax burden.

Motive 9: The Financial Motive

Most of the motives for an M&A deal are largely strategic in nature.But at times a company is also bought essentially for its stream of cash flows.

This is usually happens when a private equity firm is involved in an M&A deal.  US investment bank William Blair advised the management of TaskUs Inc. on a sale to private equity giant, Blackstone. Blackstone acquired TaskUs Inc. for a fee in excess of $500 million.

Motive 10: Opportunism

Companies don’t always look for an acquisition when one lands on their doorstep, they look at an M&A when they see an opportunistic deal of getting to buy a company below its intrinsic value. JP Morgan’s 2008 ‘fire sale’ deal for BearStearns, which it acquired at a supposedly knockdown price, is the best example of a deal that found a company rather than the other way around.

Conclusion

More often than not, when an M&A Deal materializes, those publicizing it will mention at least one of the motives included above, if not two or three.