Why Corporations Merge With Or Acquire Other Businesses

Why Corporations Merge With Or Acquire Other Businesses

With various growth opportunities come an equal amount of obstacles to achieve them. As any entrepreneur can attest, expanding and growing your company is anything but simple, especially when your business is operating in a saturated industry or the organisation has reached a plateau.

However, as a business owner, you also cannot afford to allow your company to stay stagnant. After all, continuous innovation is integral to staying ahead of the competition and remaining relevant among your target audiences. But when organic growth becomes increasingly limited, what other options remain? The answer lies in mergers and acquisitions (M&A).

In fact, mergers and acquisitions in Singapore have reached record highs in the first half of 2021, almost doubling the value recorded in the same period last year. So why has the M&A route remained a popular strategy among many businesses in Singapore? Let us provide a deeper insight into the rationales behind this decision.

1. Upgrade product capabilities or enhance and add value to existing services

A company requires significant time and money to develop and bolster its existing offerings and add more value to them. Whether it is expanding R&D or manufacturing resources, investing in relevant technologies, or recruiting the right talents, these efforts need time and money to acquire. While going the M&A route still requires a significant sum of money, the time saved from the acquisition may justify the purchase.

A great example of this would be General Motors acquisition of Silicon Valley start-up Cruise Automation in 2016. Developing a complex self-driving system organically might have required too much time, allowing General Motors’ competitors to outpace the company in the autonomous vehicle race. By acquiring Cruise Automation, which specialises in autonomous vehicle technology, the organisation can remain competitive in its business space.

2. Achieve new market breakthroughs

It can take years to gain a foothold and build a solid distribution network in a new market. Moreover, achieving such a feat requires extensive knowledge of the targeted business market and the right connections. There may also be further barriers to entry, such as government policies, existing licensing issues, or the lack of technological know-how that may prevent a company from solidifying its position in a new market.

However, by acquiring an established brand that is already well-known in the region, conglomerates can cut through all the red tape and save significant time in achieving a breakthrough. In fact, going the M&A route is often the more economical and smarter move in such situations, as the acquired company already has an established presence and the tools and expertise to operate in this foreign market, negating the need to start from scratch.

3. Increase supply-chain pricing power

The pricing of a company’s products or services is often influenced by its supplier and distributor. When the cost of supplies or distribution increases, companies often pass on these costs to the consumers.

However, by buying out its distributor or supplier, a business can eliminate this cost from its expenses. This transaction, which is referred to as a vertical merger, lets an organisation save on a reoccurring payment, reducing production cost in the long run, thereby allowing the company to ship out its products at a lower price.

One last thing to note

If your company is considering a merger or acquisition of another company, you will need to perform your due diligence to ensure the transaction goes off without a hitch. During the negotiation process, you will have to ensure your business knows what it is buying and the obligations it is assuming. This includes any liabilities, debts, or risks.

As such, it is vital to get a seasoned auditor to take a look at the seller’s financial records to ensure there are no irregularities before finalising the deal. This is particularly crucial for private company acquisitions, as the selling company may not be subjected to the scrutiny of the public markets, and you may not be able to acquire the information you need to make an informed decision.

If you do not have an auditor on your company’s payroll, you may want to consider engaging the services of a specialised audit firm in Singapore to assist you with the acquisition deal. At Ackenting Group, we provide a suite of professional audit services that cater to your business’s every need. With our experienced auditors vetting through the financial records of the selling party, you can rest easy knowing everything is in order when you finalise the deal.

Conclusion

Growth and expansion are necessary for your business to maintain its position in the market and stay ahead of ever-increasing competitors. However, every company may eventually find itself hitting a plateau. When this scenario occurs, you may find yourself turning to mergers and acquisitions to spark a crucial transformation that can propel your organisation to new heights.

If you require any assistance on accounting services, feel free to drop us an email at johnwoo@ag-singapore.com or contact us at +65-66358767. At Ackenting Group, we offer a complimentary 30 minutes online consultation for us to better understand your business requirements.

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