Current drivers for mergers and acquisitions
Snr Technology Program Manager/Pearson Publishing (via TEKsystems) - AdvisoryCloudTM
M&A activity will continue to be an important part of the strategy of many companies. There are many drivers for M&A activity, with the following being key drivers in the current climate - both economically and technologically.
This is currently a key driver. Rapidly changing technology, such as changes in biotechnology and also hi-tech/digital. In addition the pressure to change costs is a driver of activity in the healthcare sector.
Under the last administration we saw a decrease in defense spending, and under this one an increase. Both increases and decreases can drive M&A activity.
Entering New Markets
An acquisition can be the most efficient way to enter a new market. This could be a geographical market, where a competitor has significant presence in markets that your organization does not. It could also be driven b product line expansion, such as Apple's acquisition of Beats Electronics, which complemented their acquisition of Shazam to expand into segments of the music and audio market where they has little or no prior footprint. Walmart's not-so-successful acquisition of Asda in the UK is an example of this (along with UK's Tesco 'Fresh and Easy' venture failing in the US).
Spreading of Risk
This has similarities to the above market expansion. However, biotech and medical device companies will acquire small competitors that have successfully developed products and passed the early federal approval stages. This reduces the risk to the acquirer since these products have passed significant R&D hurdles to reach the current stage of development.
Responding to Consumer Trends
Many acquisitions in the consumer space are in response to trends and the recognition that, for example, consumers are looking for 'one stop shops'. Amazon has significantly expanded its portfolio over the years to enable them to meet a broader range of consumer shopping needs - including the well known acquisitions of Whole Foods (Grocery) and Ring (home automation).
Well known brands are acquired because the purchaser knows that it is less expensive to buy a brand with strong customer 'goodwill' than it is to build it over many years.
Occasionally, the owner will choose to sell their business resulting in a company buying the business in order to prevent their competitors from buying the business.
This is another version of the necessity reason, however, this is strategically driven. In the IT and technology market, IBM transformed itself from a pure hardware vendor to a software, services and consulting business. In order not to be squeezed out, Xeros merged with ACS, HP acquired EDS and Dell Computer acquired Perot Systems. We will not judge the success of the transactions here, but these were driven by a need to transform the internal business in order to face an external competitive threat.
I've provided a quick run down of key drivers for Mergers and Acquisitions, with a focus on the current environment. In future, I will write further articles on M&A topics - feel free to request any areas of interest!