Acquisitions are hard, but when done properly, and for the right reasons, mergers & acquisitions can generate tremendous value.  Simply put, the goal of M&A is for the value of the combined entity to be greater than the sum of the parts. 

This can be accomplished by achieving:

• 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.
  
  
• Synergy
  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 fair share 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.

When not to Acquire

Acquisitions fail to deliver upon objectives when the benefits are marginal and buyers overpay.  Competitive sales auctions (i.e. a business with several offers on the table) often result in a winning bid that leaves little room for unforeseen events. 

Successful acquisitions occur when the acquirer has made a considered plan, defined his or her acquisition criteria and then proactively seeks out targets that are a strategic and cultural fit.