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Home > Mergers and Acquisitions Checklists > The Rationale for an Acquisition

Mergers and Acquisitions Checklists

The Rationale for an Acquisition


Checklist Description

This checklist outlines ways to help with understanding of the rationale of an acquisition of a company or business.

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Definition

Companies and businesses are bought and sold regularly all over the world. Acquisition is a complex and expensive process that influences both the business and financial future of the buyer. Why would a person either physical or legal decide it is time to acquire a company or business? Which factors drive its decisions and define its thought process?

A person with no experience of running a business may find it difficult to assess and scale the difficulties and risks of an acquisition. At the opposite extreme, an experienced business person may readily understand and be able to assess more clearly the reasons for an acquisition. It may be that the buyer wants to develop his existent interests and the acquired business will provide the key technology to help with the expansion of the overall operation. The business to be acquired may bring to the buyer the perfect supply chain, which otherwise will take time and expense to set up from scratch. It could well be that the workforce of the company to be acquired has such specialist skills and knowledge for these to be the main incentive for the acquisition, as an alternative to instigating a training programme for existing employees. Another reason could be that the brand and customers of the business to be purchased are of such value that they justify the acquisition rather than the time and expense of the buyer building its own.

Whatever the reasons for an acquisition, a buyer should consider the following practical suggestions.

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Advantages

  • Any existing, successful business will already be functioning and properly set up.

  • The workforce of the business will already be in place and well organized.

  • The business’s marketing and contacts will be established.

  • Its customer base will also be well established.

  • Acquiring a well-developed business or company will make it easier to borrow money, because the company will already have a good business plan in place and will offer credibility to the lender.

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Disadvantages

  • The acquisition of an existing company or business could have a negative effect on the business’s reputation within the market if the acquisition is not done professionally, with due diligence and care.

  • An acquisition can negatively influence a business’s staff, who are usually excluded from any negotiations.

  • The cost of an acquisition is usually high and will have to be paid all at once.

  • Contracts with suppliers and contractors may have to be reassessed and renegotiated.

  • Any missteps in integrating the new business can be costly.

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Dos and Don’ts

Do

  • Carefully balance the implications of a developing business against the advantages and disadvantages of acquiring an existing one before committing to any expense.

  • Obtain relevant advice regarding the acquisition.

  • Research the market carefully before making a decision.

Don’t

  • Don’t rush into the unknown without a proper plan. It is easier to make a good decision in a market and area of business to which you are already accustomed.

  • Don’t underestimate the need for proper research and professional advice.

  • Don’t ignore the importance of integrating the new operations within the existent business, otherwise the consequences could be costly.

  • Don’t be afraid to decide against the acquisition if the signs are that it will not be a good investment. However, make sure that no commitment to buy has been made in the relevant jurisdiction.

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Further reading

Books:

  • Dewhurst, John. Buying a Company: The Keys to Successful Acquisition. London: Bloomsbury Publishing, 1997.
  • Miller, Edwin Mergers and Acquisitions: A Step-by-Step Legal and Practical Guide. Hoboken, NJ: Wiley, 2008.
  • Rao, P. M. Mergers and Acquisitions of Companies. New Delhi, India: Deep & Deep Publications, 2002.

Article:

  • Rowan-Robinson, Jeremy, and Norman Hutchinson. “Compensation for the compulsory acquisition of business interests: Satisfaction or sacrifice.” Journal of Property Valuation and Investment 13:1 (1995): 44–65. Online at: dx.doi.org/10.1108/14635789510077287

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