Can firms gain Competitive advantages and growth from acquisitions?

There has been much treatment of whether houses can accomplish growing by acquisitions or non. Harmonizing to Sudarsanam ( 2003 ) , an acquisition refers to acquirers utilize hard currency, stock or other assets to buy mark house ‘s portion and gets the operation right while the mark house ceases to be. Harmonizing to Gaughan ( 2007 ) , houses have several motives to get another house in order to accomplish growing such as enlargement of market power, fiscal inducement, and revenue enhancement motivations. Furthermore, compared to internal development of companies, an acquisition is a fast manner to accomplish the growing. Gaughan ( 2007 ) besides argue that particularly in a slow-growth company, it is much easier to better gross revenues and derive more gross by acquisitions. However, non all companies gain their net incomes after acquisitions. Stockholders in the geting houses may hold more hazards and lose their investings because of imprudent acquisitions. Gaughan ‘s statistics ( 2007 ) from 1980 to 2001 show that on norm, geting companies lost 25.2 million dollars. It seems clear that most acquirers have some operating jobs.

This essay will try to show that non all companies can utilize acquisitions to accomplish growing because there are some factors which limit or prevent growing. In order to show this, it will be shown that foremost, acquisitions may increase costs and gnaw the net incomes and secondly that the market portion and synergism do non vouch to accomplish growing. At the same clip, the different consequences in growing because of house size and payment methods will be discussed.

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Competitive advantage – cost-saving

One of the chief motives of acquisition is cost decrease. Some concern people claim that if new houses attempt to come in into the new market, they can utilize acquisitions to salvage the cost of production and derive the competitory advantage ( Sudarsanam, 2003 ) . Indeed, offering house can get more resources from mark houses to bring forth the new merchandises and derive more net incomes. Harmonizing to Sudarsanam ( 2003 ) , the invention ability can make up one’s mind whether companies have sustainable development or non. Acquisitions help companies to get some patents or technological accomplishments from mark houses and enter into the new market. Furthermore, they can salvage the clip cost and budgets for developing their employees to run the machines.

Hill ( 1999 ) gives the illustration of the acquisition of Nixdorf AG by Siemens AG. Nixdorf AG is a computing machine hardware and package maker. This company owned valuable patents and gained a batch of net incomes. However, Nixdorf AG experienced the fiscal crisis during the terminal of 1980 because the monetary value of computing machine all of a sudden dropped. This crisis enforced Nixdorf AG to neutralize their belongingss. Siemens AG, a communicating company, utilized this chance to get Nixdorf AG and owned the abundant technological resources. Finally, Siemens AG became the largest package company and second-largest hardware maker in Europe.

Repute of the cost-saving statement

Although Siemens AG succeeds in acquisition and wins the market portion of its industry, other experiences of companies may be non fortunate. The cost of acquisitions may negatively act upon the stockholders ‘ rights and curtail the growing. Acquirers take non merely the assets of mark house but besides the liabilities ( Moeller, Schlingemann, Stulz, 2004 ) . For illustration, Georgia-Pacific paid $ 3.74 billion to Great Northern Nekoosa Corp, the paper merchandise maker in US, for acquisition in 1990. At the same clip, Georgia-Pacific besides took $ 1.3 billion in debt from Great Northern Nekoosa Corp. Finally, the debts in Georgia-Pacific addition to $ 6 billion because of the heavy involvement cost and falling paper monetary value. Georgia-pacific has suffered from the tremendous losingss ( Hill, 1999 ) . The debts influence the market value of endeavors and cause acquirers have inauspicious hazards. In this instance, Georgia-Pacific lost its chance to accomplish growing.

In add-on, there are some restrictions and challenges for acquisitions. The resources from mark houses should be quickly incorporate and managed by acquirers. Sudarsanam ( 2003 ) defines integrating as “ the demand to keep the discreteness of the acquired concern, including systems, procedures, processs, scheme, describing systems, etc. ” However, in fact, the integrating of resources between two companies is a hard undertaking and ever takes a batch of clip. Harmonizing to Sudarsanam ( 2003 ) , integrating non merely changes the construction of companies but besides rebuilds the new human resources, particularly in hierarchy of authorization. Indeed, acquirers normally allocate their ain directors to the acquired company because these directors clearly know the enterprise civilization and disposal procedure of the acquirer company. However, it is non easy to alter the employees ‘ attitudes, working wonts, and civilizations. It seems clear to anticipate that command houses should pass more clip to be familiar with the new direction system or the production procedure.

Furthermore, acquisitions may cut down employee morale ( Gaughan, 2007 ) . The employees in geting houses and mark houses may worry about the negative impacts of acquisitions such as unemployment or occupation rotary motion. This likely affects their normal on the job public presentation and acquirers may pass more costs on seeking other staffs to replace the original employees of mark houses. If happened, they may pass more costs on developing the new staffs and reorganise their on the job squads. These disposal cost may be a load for the acquirers.

Furthermore, the deficient originative abilities of mark houses may go obstructions of acquirers ( Sudarsanam, 2003 ) . Das and Teng ( 2000 ) provide the illustration of Research & A ; Development section: if research workers can non get their research resources from their new endeavors, this will impact their on the job efficiency. These factors likely limit companies to accomplish growing. Therefore, these possible costs likely affect the normal operating public presentation of endeavors and suppress the growing of companies.

Competitive advantage-market portion

Another motive for acquisitions is the enlargement of market power. Compared with internal development in company, enlargement in acquisition may be a much rapid manner to accomplish the growing. It is besides a good method to utilize acquisition to increase the market power. Gaughan ( 2007 ) defines enlargement as “ variegation. ” This means companies may hold diverse concern or come in the new market through acquisitions. They may get new engineerings or a new merchandise line from mark houses to bring forth the new merchandises. Acquirers besides possibly busy the original market power of mark house and spread out their market portion. This may gain more money and achieve the growing of gross revenues. Hill ( 1999 ) gives the successful illustration of the acquisition. Volkswagen, an car manufacturer, planed to come in a luxury auto market to vie with Bavarian Motor Works ( BMW ) . Volkswagen acquired Rolls-Royce Motor Cars and got the professional production engineering. Finally, the gross revenues of cars increased 13.2 per centum for the first six months of 1999 and rose 84.7 per centum in North America entirely. Therefore, offering house can spread out their market power and may accomplish the growing.

Refutation of the market portion statement

However, this is non a warrant that an acquirer can ever keep the market advantage. The concern environment alterations fast and commercial activities develop quickly. In the short tern, the acquirer may derive the marker power. However, in the long tern, the rivals may busy the acquirer ‘s market portion by utilizing other selling methods. For illustration, the rivals may follow much lower monetary value of commercial merchandises or supply aftercare service to pull the consumers. Therefore, acquirers non merely better their competitory advantages by acquisition but besides seek for other ways to accomplish growing. Sudarsnam ( 2003 ) besides indicates that non-acquired houses have 88 per centum of market portion. However, acquired companies simply have 18 per centum of market portion in the US. This means that the non-acquired houses have more market portion than acquired companies have. It seems clear that merely trusting on the acquisition is non plenty to accomplish growing.

The competitory advantage – synergism

Another motive of acquisition is synergy. Harmonizing to Das and Teng ( 2000 ) , synergism can be defined as “ an integrating of auxiliary resources ” . Through synergism, companies can easy derive economic systems of graduated table or cut down the cost of capital without necessitating to pass extra money on equipment or land. Furthermore, acquirers can utilize some methods to cut down their costs. For illustration, they may alter the methods of production in order to better work efficiency. Bidding houses may hold some competitory advantages so that they are qualified to get other companies. Bidding houses may portion their successful experience or supply some engineerings to the mark houses. If two companies can corporate good, this may assist acquirers derive more net incomes.


Refutation of the synergism statement

However, acquisitions bring more demands on direction ( Gaughan, 2007 ) . It tests decision makers ‘ capablenesss to pull off more resources and to run the bigger companies. Lack of effectual corporate administration may lose investors ‘ assurance and influence market rating of houses ( Philippe and Jemison, 1993 ) . Therefore, synergism is non a warrant that companies will derive more net incomes. If resources are deficient, it may blow more costs to keep the basic outgo. Furthermore, the unsuitable direction possibly threatens the normal operation of acquirers and negatively influences the stockholders ‘ returns. Therefore, in order to make the growing of houses, directors non merely see the value by acquisitions but besides guarantee that whether the cost of acquisitions far outweigh the making value or non ( Sudarsanam, 2003 ) .

The influence of house size

Moeller, Schlingemann, Stulz ( 2004 ) demonstrate that there are different effects of acquisitions in house size. The private house can be defined as a little house ; the public house is defined as a big house. The acquisition of private houses may get more returns than the acquisition of public houses. The ground is that the public house is more likely to be overvalued ( Moeller, Schlingemann, Stulz, 2004 ) . This means that a batch of assets in public houses are hard to mensurate the accurate existent monetary values. Furthermore, good will is besides hard to value in public houses. Harmonizing to Sudarsanam ( 2003 ) , good will can be defined as “ the extra monetary value of the just values of assets ” . Because the public house owns more resources and expects create more excess value, stockholders are willing to put more money in this company. They besides have more complicated accounting systems than private houses do. Therefore, this is really common to hold rating mistake because the information in public houses is non to the full disclosed ( Sudarsanam, 2003 ) . This may impact how much acquirers have to pay in the acquisition. The rating mistake will derive more costs and negatively act upon the stockholder ‘s rights.

In add-on, most of directors in little companies are much easier to hold the common position from the stockholders ( Moeller, Schlingemann, Stulz, 2004 ) . The ground is that there are few assets in little houses so that the directors in little houses have more right to pull off and apportion the resources. Therefore, the directors in little mark houses are much easier to corporate and negotiate with geting house. If bidding houses can acquire more supports from the mark houses, the command houses are much easier to accomplish the growing.

The influence of payment methods

Harmonizing to Gaughan ( 2007 ) , the payment methods influence the benefits of houses, including hard currency and equity. In add-on, because of information dissymmetry, investors normally have different positions for an acquisition. This phenomenon likely affects the payment method of an acquisition. There is the different consequence of hard currency offer and common stock alteration. Harmonizing to Travols ( 1984 ) , acquirers prefer to buy the assets or stocks from mark house by hard currency offer because they believe that their company is undervaluation. Investors normally believe that utilizing hard currency to get another company is a positive signal. Therefore, after the acquisition, the stock monetary value of the command house would lift. The stockholders in the command house besides gain more wealth. On the other manus, if the director of a command house uses stock to make the acquisition, investors may hold erroneous rating. This point is supported by Gaughan ( 2007 ) every bit good. He indicates that paying by hard currency has obvious consequence of bettering wealth. It seems clear that different payment methods have different consequences and affect the growing of companies.

However, the payment methods are related to whether the acquirers can salvage the revenue enhancement or non. The monetary value of stock alteration is depend on the just market value. If the acquisition is processed by stock alteration, the acquirers may hold revenue enhancement free. On the other manus, if geting houses purchase the assets or stock of mark house by hard currency, geting houses may pay a saddle horse of revenue enhancement and increase the cost ( Gaughan, 2007 ) . The revenue enhancement payment may be a large load for the acquirers and negatively act upon the growing.

Therefore, pre-acquisition is a really of import procedure to measure which purchase method has more competitory advantage. Both stock alteration and hard currency have some advantages and drawbacks. This besides tests the abilities of directors and comptrollers to assist companies use the lowest cost to get the most benefits. The payment methods may act upon the different consequences of the growing.


In decision, this essay has attempted to show that although acquisitions have some benefits to accomplish growing, it besides leads to many jobs. The pre-acquisition is a really of import procedure to analyse the unsure hazards and payment methods. Acquirers should deeply analyze whether acquisition can make more net incomes and achieve the growing or non. In add-on, the directors in command houses should anticipate the possible hazards such as the fiscal place of mark houses and investing environment. Furthermore, acquirers should carefully cipher the expected returns to forestall the overpayment before an acquisition. Furthermore, Haspeslagh and Jemison ( 1991 ) indicate that “ Pull offing the post-acquisition integrating procedure to make the value hoped for when the acquisition was conceived. ” The director should do attempts to cut down the struggles of two companies. It may be true that through acquisitions, companies may increase their market power. However, acquirers should look for other ways to derive their market portion every bit good. In add-on, the size of endeavors may hold different consequences of acquisitions. We have to see the cost whether surpass border net incomes. All of these factors will act upon the growing of houses in acquisitions.

Presents, amalgamations and acquisitions become a tendency to spread out the concern. It seems that there are more and more companies will cover amalgamations or acquisitions in order to increase their competitory advantages. These companies may hold solid capitals. It means that people have fewer picks of merchandise and these companies may confront the monopoly jobs.



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