What's so great about industry acquisition?
What’s So Great about Industry Acquisition?
You’ve worked hard for your money, and, in turn, you want your money to work hard for you. While it may seem that the best investment of your hard-earned capital would be market expansion, many companies are using what seems like a fortune in capital to acquire other companies instead.
Epiq Systems, Inc., for example, recently agreed to pay $134 million for the acquisition of Iris Data Services, Inc. (IDS), a move that will combine two providers of legal technology services, which raises the question, “Why?” What is the advantage of investing such huge sums of money in another company within the same industry as opposed to using those hard-earned funds in deeper market research and expansion?
The fact is, many of the Fortune 500 companies have achieved their status through acquisitions. Granted, some of them have forged their own way into the market through sheer hard work, wise investments, and marketing savvy. However, many have taken advantage of the profitable concept of acquisition to experience exponential growth. Why is that so?
It all boils down to one key concept: synergism – the combining of distinct agencies such that, in the end, the whole is even greater than the sum of its parts. It's like one plus one equaling three. It’s an alternative to relying purely on external growth strategies and, instead, increasing expansion, marketing, purchasing power and financing in an exponential way.
Advantages of Acquisition
One key advantage of acquiring a company in the same industry is the expansion of market reach. A company that specializes in legal technology, for example, may typically target law firms and appeal to the security of sensitive legal data, while another company may provide similar security for medical offices that are accountable to HIPAA requirements. The acquisition of such a company in the same industry with a different market can open the door for substantial growth.
One recent example of such an acquisition is DTI’s purchase of Merrill Corporation’s Legal Solutions Business. The acquisition significantly expands DTI’s ability to meet the needs of its clients on a world-wide basis as it adds legal service operations and new service offerings in Ireland, the United Kingdom, Singapore, Hong Kong, Australia and New Zealand. That’s quite an “instant expansion” that marketing alone may take months or years to accomplish!
However, an acquisition has far more gains than mere market expansion. Another major benefit is the ease of obtaining financing after the unity. Lending institutions as well as investors express far more confidence in real financials than they do in mere projections and business plans, regardless of how credible they may seem. In an acquisition, financial growth is almost instantaneous.
Further benefits of an acquisition include a reduction in overhead (as compared to the volume of production) and purchasing power via volume discounts. In fact, a company that is in a financial position to acquire one or more of its suppliers experiences the synergism factor much sooner than a company that continues to rely on outside manufacturers. Imagine the potential of a retail company that manufactures most of its own products. The need to deal with the wholesaler “middle man” is entirely eliminated, thus boosting profits substantially.
Drawbacks to Industry Acquisitions
While the benefits to an industry acquisition are enormous, there are, realistically, some drawbacks, as well. For example, while a tax liability may be lessened by the acquisition of a less-profitable company, legal limits on those benefits may make the undertaking less appealing.
Besides the tax liability, there is a potential liability when the acquisition is made through stocks. The acquiring company can possibly become a party to undesirable legal action.
On the whole, however, an industry acquisition is by far an advantageous move on the part of any business, be it large or small. The potential for instant growth, expanded marketing, ease in financing and purchasing power, among other benefits, make an acquisition a highly-desirable choice.