Question

Why must a company choose acquisition over strategic alliance and in-house production (Make)?

Answer 1

****Acquisitions:

Acquisitions, on the other hand, refer to processes in which one company buys the other company. In such a situation the buying company absorbs the bought company into the existing company. Acquisitions can be carried out either to eliminate competition by absorbing the competing company or to expand the corporate portfolio by retaining the acquired company as an independent entity under the overall corporate management. As is evident from the many examples acquisitions serve three main purposes: viz. can serve as a market entry strategy, as a corporate portfolio expansion tool, and as a competitive defense mechanism.

****Alliances:

Alliance is an approach in which two or more companies agree to pool their resources together to form a combined force in the marketplace. Unlike a merger, an alliance does not involve the emergence of a new combined entity. Each participant in the alliance retains their individual entity but choose to compete against competitors as a unified business force. The joint venture is a very popular form of an alliance. This was not because of any regulatory restriction but more because of its need to learn about an alien market and get a foothold. Therefore joint ventures are indeed a very common entry strategy for companies. This approach has its own pros and cons. The obvious advantage is that companies entering markets through JVs would benefit from the local knowledge of the local company. The obvious disadvantage is that companies entering new markets may be taken for a ride if joint ventures are not agreed upon carefully. As such, defined simply, alliances are less risky than acquisitions because they are negotiable, co-operative and easier to walk away from. They bring two firms together with mutual interests but different strengths to work on particular projects that offer benefit to both.

**** Company choose acquisition over strategic Alliance due to following reasons:

Some of the reasons why companies merge with or acquire other companies include:

1. Synergy: The most used word in M&A is synergy, which is the idea that by combining business activities, performance will increase and costs will decrease. Essentially, a business will attempt to merge with another business that has complementary strengths and weaknesses.

2. Diversification / Sharpening Business Focus: These two conflicting goals have been used to describe thousands of M&A transactions. A company that merges to diversify may acquire another company in a seemingly unrelated industry in order to reduce the impact of a particular industry's performance on its profitability. Companies seeking to sharpen focus often merge with companies that have deeper market penetration in a key area of operations.

3. Growth: Mergers can give the acquiring company an opportunity to grow market share without having to really earn it by doing the work themselves - instead, they buy a competitor's business for a price. Usually, these are called horizontal mergers. For example, a beer company may choose to buy out a smaller competing brewery, enabling the smaller company to make more beer and sell more to its brand-loyal customers.

4. Increase Supply-Chain Pricing Power: By buying out one of its suppliers or one of the distributors, a business can eliminate a level of costs. If a company buys out one of its suppliers, it is able to save on the margins that the supplier was previously adding to its costs; this is known as a vertical merger. If a company buys out a distributor, it may be able to ship its products at a lower cost.

5. Eliminate Competition: Many M&A deals allow the acquirer to eliminate future competition and gain a larger market share in its product's market. The downside of this is that a large premium is usually required to convince the target company's shareholders to accept the offer. It is not uncommon for the acquiring company's shareholders to sell their shares and push the price lower in response to the company paying too much for the target company.

****When should be alliances be preferred over acquisitions:

1)Any M&A transaction involves the creation of almost permanent relationships Thus in situations when companies are desirable of having short to medium term relationships strategic alliances can be a better option since the parties to the alliance can decide the tenure of the relationship.

2)M&A involves huge transaction costs and is practically irreversible. In today’s dynamic world companies’ growth strategies may keep on changing and they may be on a lookout for a nimble-footed alliance where the unwinding work if required can be done without significant additional costs and time.

3)Alliances can be an extremely effective way to embrace new strategic opportunities, pursue new sources of growth, and contribute to the upside of the business. They are particularly useful in situations of high uncertainty and in markets with growth opportunities that a company either cannot or does not want to pursue on its own.

4)One of the main reasons to engage in an alliance (as opposed to M&A) is to share risk and limit the resources a company must commit to the venture in question. Risk can take many different forms. One is the financial risk associated with the high costs of the investment that is required to pursue a particular opportunity. An alliance can be a way to spread— and sometimes even lower—those costs.