Q&A - Why are acquisitions so popular as a method of business expansion?

The takeover of one business by another is big business in itself! Tens of thousands of business advisers (lawyers, accountants, venture capitalists, merchant bankers, PR consultants) spend their lives researching, organising and negotiating acquisitions - earning billions of pounds in fees each year for their services. In the first 9 months of 2010 alone, the value of businesses bought and sold in this way exceeded 2 trillion US dollars. We know that acquisitions are risky. So why are they so popular?

When firms choose between the options for pursuing their growth objectives, there are several reasons why acquisitions appear an attractive choice:

• Existing products are in the later stages of their life cycles
• Business lacks knowledge or resources to develop organically
• Speed of growth is a high priority
• Competitors enjoy significant advantages that are hard to overcome

Looking at the history of business acquisitions over recent decades, it is possible to identify a wide range of reasons why they have been made:

- Speed of access to new product or market areas
- Increase market share
- Acquire new skills
- Access economies of scale (perhaps by combining production capacity)
- Secure better distribution
- Acquire intangible assets (brands, patents, trademarks)
- Overcome barriers to entry to target markets
- Defend itself against a takeover threat
- Enter new segments of existing market
- To eliminate competition
- Spread risks by diversifying
- To take advantage of deregulation