Business Acquisition Strategies: What are they? | Hilton Smythe

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Business Acquisition Strategies: What are they?

There is a substantial market for companies seeking strategic acquisitions. In this guide, you will learn what business acquisitions are and the various types available.

Business acquisitions are a powerful tool in your arsenal for achieving rapid business growth. Companies seeking to dominate their respective industries often push through business acquisitions to tighten their grip on an existing market or expand into a new one.

In 2021, UK domestic acquisitions peaked at 1,198 before declining 20% in 2022. Nonetheless, this is a substantial market for companies seeking strategic acquisitions. In this guide, you will learn what business acquisitions are and the various types available.


What are business acquisition strategies?

Business acquisition strategies consist of the various methods and techniques companies use to acquire or merge with other businesses.

These strategies are utilised to fulfil a specific purpose, such as:

  • Expanding your market share.
  • Gain access to new technologies.
  • Acquire talented employees.
  • Increase economy of scale.
  • Eliminate competition.

Your acquisition strategy will revolve around analysing potential businesses to acquire and what you want to achieve through that acquisition. Strategies also include funding considerations, such as how you will acquire the financing needed to complete an acquisition.

Now has never been a better time to plan an acquisition strategy. The UK’s acquisition market is hot, especially within specific industries. For example, the number of retail M&A deals has surged 30% post-pandemic.


What is a strategic acquisition?

Business acquisitions happen for a variety of reasons. Since 1985, approximately 103,070 M&A deals have been completed. Some are purely for financial reasons, but many fall into the strategic acquisition category.

A strategic acquisition involves purchasing a company to achieve your strategic objectives. These transactions could be used to access new markets and technologies, expand your internal capabilities or gain competitive edges.

What separates strategic acquisitions from financial acquisitions is that these are aligned with the long-term strategic vision of your organisation.

Some of the defining features of strategic acquisitions include:

  • The acquisition creates synergistic benefits, such as providing new revenue growth opportunities.
  • The acquisition of the company must be done in line with “strategic fit.” In other words, the new combined company must contribute to the acquiring company’s long-term objectives.
  • The acquisition must provide long-term value instead of just short-term financial gains.
  • The acquisition can help your brand to achieve a stronger market position.
  • The acquisition must be made via the lens of risk mitigation to strengthen the foundations of your business.

What is the purpose of a business acquisition strategy?

Business acquisition strategies are designed to help you pinpoint the correct prospects, ensure legal compliance and choose the right company to acquire for your business. Whether you are making a strategic or financial acquisition, these investments require careful due diligence.

Possessing a set strategy acts as a guide throughout each step of the process. It involves instructions for creating a team to manage each stage of the acquisition, such as:

  • Finding the right prospect.
  • Providing an accurate financial valuation for the company.
  • Risk mitigation.
  • Achieving legal compliance.
  • Managing the post-transaction transition.

Adopting a systemic approach to acquiring a new business enables you to move swiftly, get sufficient value from the transaction and create opportunities your business can exploit within its playground.


The types of business acquisitions

Countless types of business acquisitions exist, but they can be boiled down to the four most common ones. Each has its purpose, and you should have a strategy for deploying each accordingly.

Let’s examine the four primary types of acquisition.

Vertical acquisition

The vertical model involves acquiring a company that holds a different space in the supply chain. It could be a company higher or lower in the manufacturing process, which is where the name comes from.

For example, instead of a company purchasing its steel from a steel manufacturing company, it could instead choose to acquire the steel manufacturing company.

The obvious advantage is that acquiring a company is far easier than building a new one. Moreover, owning the means of production gives you more control and can trigger significant cost savings within the supply chain.


Horizontal acquisition

In contrast, horizontal acquisitions have nothing to do with the supply chain. Instead, horizontal acquisitions involve one company buying another within their industry.

One of the most prominent examples of a horizontal acquisition is when Facebook purchased Instagram. It’s classified as a horizontal acquisition because both companies perform the same function for an identical audience.

Horizontal acquisitions are ideal for eliminating the competition and increasing your market share. However, you must be aware of Chapter II of the Competition Act 1998, which prohibits monopolies.


Conglomerate acquisition

Conglomerate acquisitions involve purchasing a company from an entirely different industry. For example, if your company manufactured shoes and decided to purchase a restaurant, this would be a conglomerate acquisition.

Companies often act as conglomerates to shield themselves from market volatility. For example, the American conglomerate Procter & Gamble produces Oral-B dental hygiene products whilst simultaneously producing Tide laundry detergents.

Large companies with their fingers in multiple pies can still make money even if one of their markets is experiencing a downturn. It’s why these massive multinationals can survive significant economic downturns even when their competitors are floundering.


Market extension acquisition

Finally, there is the market extension acquisition. These acquisitions are designed to help you to expand into new markets.

For example, if you’ve succeeded with your restaurant chain in the UK, you may purchase a successful one in Germany. The German chain would continue operating as usual (perhaps under the same brand name), but your UK company now owns it.

Market extension acquisitions are often used to absorb rising stars before they can threaten your company. You acquire them instead of competing with a brand to maintain your market share.

These acquisitions are an excellent choice if you want to enter a new market without starting from the bottom and competing with established brands.


What is the difference between a merger and an acquisition?

Mergers and acquisitions are terms used interchangeably by some, but whilst they’re closely associated, they’re two different things.

Mergers occur when two companies agree to combine their operations and form a new entity. These moves are made to achieve mutual benefits for both brands. On the other hand, acquisitions are takeovers, where one company purchases another.

During an acquisition, one company may wrestle total control of the new combined entity. Occasionally, acquisitions may be made despite the purchased company’s wishes, known as a hostile takeover. Note that acquisitions may be a combined entity. Still, there is no guarantee that a new brand will be created.

For example, a merger involves combining the two brands. An acquisition may eliminate a brand entirely and trade under the purchasing company’s existing brand.


What are the benefits of business acquisition strategies?


Why should you take the time to compile different business acquisition strategies to pursue your organisation’s long-term strategic goals?

Ultimately, the first thing to understand is that a business acquisition strategy is a growth strategy at heart. Growing via acquisition is an intelligent step that can supercharge your growth, similar to attracting new third-party investment.

Acquisition strategies are designed to skip the steps needed to grow organically. Some of the reasons for cementing these strategies include the following:

Expand Your Market Footprint – Acquisition enables you to expand your market presence in an existing market or to make a splash in a new geographic market.

Access New Markets – Buying another company provides access to an established customer base and supply chain within a new geographic market.

Incorporate New Capabilities – Whether it’s a patent-pending piece of technology or intellectual property, acquisitions allow you to gain competitive advantages you wouldn’t otherwise have access to.

Make Cost Savings – Vertical and conglomerate acquisitions allow you to make significant cost savings on expansion. You can reduce your overheads, consolidate your supply chain, and optimise your resource allocation.

Diversify Your Business – Like any investor, businesses must also consider diversification as a way to protect themselves from the trials and tribulations of the market. Diversification through acquisition can provide much-needed stability that isolates you from individual market troubles.

Enhance Shareholder Value – Bolster your financial performance with a successful acquisition. Increasing your overall revenue and profitability can improve your shareholder value and attract further investment.


Your acquisition strategy ensures a clear vision whenever you consider purchasing another company. It allows you to move efficiently and guarantees everybody is on the same page.


What to consider for a successful acquisition strategy

Successful acquisition strategies maximise your chances of seeing your transaction go through without a hitch. As a UK business, you are in a powerful position. Today, the UK is the third most popular market for mergers and acquisitions, behind the U.S. and China.

So, what should you include as part of your acquisition strategy?


Strategic alignment

In layman’s terms, why do you want to acquire a company?

The first step to a successful acquisition strategy is defining why you want to acquire a company. It could be anything from gaining a competitive advantage to acquiring talent from a growing startup.


Target identification criteria

Choosing from thousands of potential companies is challenging, so you must set clear criteria for what makes an ideal target.

It could include factors like:

  • Market positioning
  • Customer base
  • Geographic reach
  • Financial performance
  • Corporate culture

This step will also include a thorough financial analysis of potential targets and the parameters that make a good target. Your team will consider cash flow, debt, profitability and overall valuation.


Due diligence

You will have a systemic approach to carrying out due diligence at this stage. This process involves identifying potential risks, legal issues, liabilities, intellectual property and customer relationships.

Ideally, you should let an independent professional take command of the due diligence stage to ensure no stone is left unturned.


Communication

Do you have a clear plan for communication with relevant stakeholders?

Particularly if you already have shareholders, you must have a plan outlining how to communicate a potential acquisition. It may involve explaining the rationale behind the acquisition and framing the potential benefits.

Be prepared to address any concerns from stakeholders.


Integration plan

It may surprise you that few companies think about integration until they are sure the deal is done; but optimal integration planning begins before you even select a target.

Consider the potential challenges and risks of integration. Likewise, think about the dedicated team responsible for executing your integration plan.


Legal compliance

Populate your team with a legal professional who understands UK corporate law, including mergers and acquisitions.

Again, don’t let an acquisition fall through because you failed to account for the law. This is something that should be outsourced to a competent professional.At Hilton Smythe, we have a team with an intimate understanding of UK law and what you must consider when pursuing an acquisition. For help with informing your business acquisition strategy, contact Hilton Smythe now.

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