Record low interest rates mean an acquisition can kick start your growth

I’m sure you’re all familiar with the term ‘acquisition’ but have you ever seriously considered it a viable component of your growth strategy? At a difficult time in the economic cycle surviving rather than growing is probably your most pressing issue. But acquisitions can be, and have long been, an excellent way to quickly increase revenues, expand products or service offerings, improve market reach and increase enterprise and shareholder value. That all sounds good but what does it really mean?

When defining an acquisitions strategy, smart companies always start with a fine-tuned business strategy. Once that business strategy is defined, they then look at acquisitions as a potential tactic that can help them achieve that strategy.

A fundamental part of every business strategy is growth, which can be achieved in a multitude of different ways. By examining key rationales for acquisition activity, it may become more evident why including acquisitions in your growth strategy warrants a closer look. The following list of acquisition benefits is not comprehensive, but it is a good start.

Scale. Greater scale provides opportunities for profit enhancement across many aspects of the company and its operations.

Market share. Control a greater percentage of the total available market. Anecdotal evidence and economic theory suggest that long-run profitability increases with market share as it gives you the opportunity to be a price maker not a price taker.

Economies of scale. Decreased per unit cost occurs as output increases. By consolidating and eliminating duplicative departments, job functions and certain processes, thereby lowering costs relative to the same revenue stream, significant improvement in margin can be realized.

Distribution channels. New or additional channels for distribution can be more quickly acquired than developed. Established distribution channels can take years to develop and are usually not easily penetrable.

High cost of excess capacity. Excess or idle capacity is a killer on margins. Every unit of excess capacity carries with it an incremental piece of overhead. Zero excess capacity equates to the lowest cost per unit.

Convergence. Products or services that incline towards each other, rather than ones that run parallel, present unique opportunities.

Cost synergies. Significant savings are generally found in production and procurement, but also present in marketing and advertising.

Intellectual property. Firms in need of IP as part of their strategy can often acquire it more quickly and less expensively than developing it.

Countercyclical balance. Firms in cyclical businesses may seek to acquire businesses that are countercyclical to absorb excess capacity or idle production.

Resource transfer. Resources are unevenly distributed across companies and the interaction of the target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources.

Vertical integration. Vertical integration is the degree to which a firm owns its upstream suppliers and its downstream buyers.

So if you believe acquisition should be part of your overall growth strategy, is now a good time? Mergers and acquisitions (M&A) deal activity has taken a precipitous drop over the last few years from the previous all-time highs. Economic factors are the key drivers behind reduced deal volume, particularly the severe tightening of the credit markets.

Although the global recession and constrained credit markets may make completing acquisitions more challenging, significant opportunities remain for well-positioned companies. Firms in stable, mature industries with strong balance sheets have opportunities not seen in decades. Lower valuations, together with fewer competitors capable of making acquisitions, indicates the time for making acquisitions couldn’t be better. Interest rates are at record lows and credit is still available for strong companies making the right acquisitions for the right reasons.

Start the new year off by giving growth-by-acquisition a serious look. First and foremost, know your strategy and take into careful consideration whether the cultural aspects of an acquisition, and the affect it will have on your employees, will be beneficial to your firm’s long-term viability.