Reasons for Acquisition

Corporate acquisition takes place when one company acquires ownership of a different company. The main motive for an acquisition to take place is usually to maximize the value of the shareholders’ interests in the acquiring company. It is a form of corporate operational restructuring that increases business growth, increase managerial efficiency, and maximizes market power of the company. Corporate managers are now facing increased pressure from shareholders in the presence of increasingly more competitive global capital markets and more informed investors.

However, for an acquisition to occur successfully, the benefits must outweigh the costs. Corporate management often needs to foresee several benefits before they make a decision to acquire a new company. The most important benefit is that when two companies are combined, it can avoid duplicate departments, which in turn lower the cost of the acquiring company relative to roughly the same revenue stream, leading to profit-making.

An acquiring company can also buy a underperforming company to benefit from the target company’s tax write-offs, although there are rules to limit the “tax motive” of the acquiring company. Additionally, through financial and operational restructuring, resources can be redistributed in a more efficient manner among the two companies. Lastly, acquisitions can combine the strengths and comparative advantage of the two companies and increase market competitiveness of the acquiring company.