The following points highlight the ten major arguments in favour of acquisition as a strategic choice for a firm. The arguments are:- 1. Reduction of risk 2. Avoidance of profit slump 3. A means of entry into a new area 4. A means of obtaining cash 5. Welding together a fragmented industry 6. Removal of competition 7. Opportunity for synergy 8. To obtain new ideas 9. To obtain new people 10. Capital cost of growth.
Argument # 1. Reduction of risk:
The acquisition of a business with suitable products may provide an opportunity for a firm to expand without being involved in the risk of two forms of failure such as:
(i) R & D may not succeed in producing the required process or product at all; and
(ii) Although R & D may have met all specifications of a new product, it may still die at the marketing stage.
Argument # 2. Avoidance of profit slump:
Acquisition may be a way of buying immediate profits, where one of the other alternative strategies would have caused a period of reduced earnings. If synergy can be properly exploited, profits in absolute terms and ROI index may increase.
Argument # 3. A means of entry into a new area:
It is not easy for an outsider to enter all new business areas. The more advanced technology and high capital-intensive industries (often the two go together) possess a measure of protection against intruders.
When such an industry requires heavy capital investments at a particular point of time or when such a firm faces the problem of obtaining necessary technical expertise at a high cost and with few chances of success, acquisition may be a very attractive strategy.
Argument # 4. A means of obtaining cash:
Certain firms may have a healthy cash-flow position, large liquid resources; yet a relatively poor history of profits. In such a situation, a company with a good profit record and a need for capital to exploit its many projects may find it possible to acquire the other company on a share exchange basis—in effect buying cash for paper.
Argument # 5. Welding together a fragmented industry:
Some industries are highly fragmented. This makes it difficult to gain a major share of the market by internal strategy. A process of acquisition and rationalisation can build up a sizeable operating unit.
Argument # 6. Removal of competition:
The strategy of acquisition in a highly fragmented industry situation may have the effect of removing competitive products—thereby, it is possible to have control over markets, reduce consumer choice, and increase prices. Such strategy can be pursued when a country’s legislation does not stand on its way.
Argument # 7. Opportunity for synergy:
Apart from cash resources, an acquisition process may bring in synergistic opportunities in the areas of R & D, production, distribution, etc.
Argument # 8. To obtain new ideas:
An acquisition for growth may have the effect of turning a sterile company to obtain new ideas.
Argument # 9. To obtain new people:
Small-to-medium-sized firms, through acquisition process, can obtain a particular personality who is running his own small business and in that case the purchase price is small.
Argument # 10. Capital cost of growth:
A business firm with a poor cash flow may not have the capital to choose the R & D route but may be able to acquire by an exchange of shares and without cash.