- Economies of scale
The combined company can often reduce its fixed costs by removing duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit margins.
- Economy of scope and cross-selling opportunities
Economies of scope are attained when, for example, efficiencies are gained by increasing the scope of marketing and distribution to additional products (sometimes creating product bundles as seen in the Telecom sector).
- Unlocking underutilized assets
In some cases proprietary resources such as R&D, patents, proprietary processes and technologies and even personnel are underutilized because of limited access to capital or other constraints. Acquisition by a more well resourced company can unlock these assets.
- Access to proprietary technology
In some cases star-up or R&D focused companies have developed technologies that can have an immediate and broad impact on the operations of leading incumbents and substantially improve their competitiveness.
- Increased market power
Acquiring a close competitor can increase market power (by capturing increased market share) to set prices.
- Shoring up weaknesses in key business areas
When talent is hard to attract, acquiring businesses that perform functions that are under performing can be an efficient way to fill gaps.
An example of synergy includes increased purchasing power as a result of bulk-buying discounts.
- Geographical or other diversification
Acquisitions can achieve immediate access to new geographic or product markets. In some cases this can also serve to reduce earnings volatility.
- Providing an opportunistic work environment for key talent
Growth through acquisitions provides managers for new opportunities for career growth and advancement.
- To reach critical mass for an IPO or achieve post IPO full value
Larger companies typically have more financing options thereby reducing capital risk. Once public, companies need sufficient trading in their shares to realize full value.
- Vertical integration
Vertical integration occurs when a company acquires its supplier and can result in significant savings if the supplier has substantial market power.
Derek van der Plaat, CFA has worked in private market M&A for more than 20 years and is a Managing Director with Veracap Corporate Finance in Toronto.