Acquisition Pros and Cons: Pros and Cons of Buy-side M&A

January 4, 2022by Nate Nead

A strategic merger or acquisition can be one of the most important means of growth for your business. The key to growth through acquisitions is to take advantages of the synergies that a carefully and successfully orchestrated acquisition should yield.

Business owners often find that growth through acquisition is a faster, less expensive, and a much less risky proposition than the traditional methods of growth realized through expanded marketing and sales efforts. Unlike growth through increased market share and sales, acquisition offers a host of other advantages, including easier financing for future undertakings and immediate savings due to economies of scale.

Most businesses growing through acquisition will find a number of other competitive advantages as well, ranging from catching the competition off guard to instant market penetration. In some cases, competitors can be eliminated entirely via acquisition.

Here are some of the most important pros and cons you should weigh when considering growth through acquisition for your business:

Pros of M&A

1. Speed.

Acquisition is one of the most time-efficient growth strategies. It offers the opportunity to quickly acquire resources and core competencies not currently held by your company. There is near-instantaneous entry into new product lines and markets, usually with a recognized brand or positive reputation, and existing client base. In addition, the risks and costs typically associated with new product development can drop dramatically.

2. Market power.

An acquisition will quickly build market presence for your company, increasing market share while reducing the competition’s stronghold. Where competition has been particularly challenging, growth through acquisition can reduce competitor capacity and level the playing field. Market synergies are achieved.

3. New resources and competencies.

Businesses may choose acquisition as a route for gaining resources and competencies currently not held. These can have multiple advantages, ranging from immediate increases in revenues to improving long term financial outlook to making it easier to raise capital for other growth strategies. Diversity and expansion can also help a company to weather periods of economic or market slump.

4. Meeting stakeholder expectations.

In some cases, stakeholders may have expectations of growth through acquisition. While not all stakeholders will insist on acquisition in particular as a growth strategy, under nearly all circumstances, stakeholders are looking for returns on any investment or other advantages for non-investing stakeholders. When there is pressure to perform and meet expectations for returns, an acquisition can often yield results more quickly than other means for growth.

5. Financial gain.

Acquiring organizations with low share value or low price earning ratio can bring short-term gains due to assets stripping. Synergy between the surviving and acquired organizations can mean substantial cost savings as well as more efficient use of resources for soft financial gains.

6. Reduced entry barriers.

Acquiring an existing entity can often overcome formerly challenging market entry barriers while reducing risks of adverse competitive reactions. Market entry can otherwise be a costly proposition, involving market research among other upfront expenses, and take years to build a significant client base.

Cons of M&A

1. Financial fallout.

Returns may not benefit stakeholders to the extent anticipated, and the expected cost savings may never materialize or may take far too much time to materialize due to a number of developing factors. These might include a higher-than-anticipated price of acquisition, an unusually long timeframe for the acquisition process, lost of key management personnel, lost of key customers, fewer synergies than projected and other unforeseen circumstances.

2. Hefty costs.

Under some circumstances, the cost of acquisition can climb steeply, well beyond earlier projections. This is particularly true in situations of hostile takeover bids. In some situations of runaway costs, the added value may not be enough to justify the cost in dollars and resources that went into making the acquisition happen.

3. Integration issues.

Integration of the acquired organization can bring a number of challenges. Company cultural clash can erupt and activities of the old organizations may not mesh as well as anticipated when forming the newly combined entity. Employees may resent the acquisition, and undercurrents of anxiety and anger may make integration challenging.

4. Unrelated diversification.

When an acquisition brings together diverse product or service lines, there can be difficulties in managing resources and competencies.  Management of employees and departments can face extreme hurdles and the time necessary to address such issues may deplete much of the value otherwise brought about by the acquisition.

5. Poorly matched partner.

Unless he or she has extensive firsthand experience in implementing acquisition as a growth strategy, a business owner who does not seek professional advice in identifying a potential company for acquisition may target a business that brings too many challenges to the equation. A failed acquisition can rob an otherwise healthy organization of

6. Distraction from operations.

When the acquisition faces too many challenges or the timeline for completion stretches out longer than anticipated, too much of the managerial focus is diverted away from internal development and daily operations. The post-acquisition organization can be harmed due to lack of managerial resources, resulting in fewer synergies or at the least, delays in savings realized from synergies.

Nate Nead

Nate Nead is a licensed investment banker with Four Points Capital Partners, LLC and Principal at Nead, LLC. Nate works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. Four Points Capital Partners, LLC is a member of FINRA and SIPC and registered with the SEC. Nate resides in Seattle, Washington.