As a result, the acquiring firms emphasize in its press release that the acquisition is not anti-competitive but a way to better serve the customers. If the U. S. regulatory agencies, however, construe that the acquisition could be anti-competitive, the acquisition may be blocked. Company growth is also one of the reasons why acquisitions occur. Acquisition is also an approach used when the acquiring firm has excess cash which can be used for investments. To reduce corporate risk, firms also purchase another company which could result in improved earnings and sales stability.
For instance, a clothing company specializes in swimwear while another clothing firm designs winter clothes. Thus, purchasing the swimwear company to gain profit during summer and spring is a good strategy to eliminate the sales instability of the winter clothing company caused by the changes in season. This example could also be used to illustrate another reason why acquisitions occur”to enter another market. The target firms experience and resources, including its employees expertise and business relationships, are readily available for the acquiring firm to take advantage of.
Thus, rather than start a swimwear collection of its own, it would be much easier for the winter clothing company to acquire the swimwear company. A companys resources could also be the target of the acquiring firm. These resources may be tangible (e. g. , plant and equipment), intangible (e. g. , trade secrets and patents), or talents of the target firms employees. Another reason cited for acquiring a firm is synergy, which is a term used to describe efficiency gained from doing more than one thing.
For example, it is a good strategy for a meat processing company to acquire a leather goods manufacturer as they require the same raw material. Finally, acquisition occurs when the owners of a family-owned business wish to retire or leave the business and the next generation is not interested to continue the business (Mullins, 2001). In an interview conducted by Barnett (2004) for her article, Benoit shared another reason why acquisitions occur. He stated that acquisition allows the acquiring firms to get new clients.
The escalating stock prices and reasonable interest rates were also considered as reasons for the increase in the number of acquisition deals (Flanagan, et al. , 2004). Even with these good reasons, many corporate acquisitions fail. A survey conducted by the KMPG reported that 83 percent of the acquisitions fell short of the forecasted plans (Lear, 2000). Additionally, in the book of Galpin and Herndon (The Complete Guide for Merging and Acquisitions, 2000), studies showed that only 23 percent of all acquisitions earn their cost of capital.
In addition, the stock prices of acquiring companies rise only 30 percent of the time after an announcement of the acquisition deal. 70 percent of the cases observed also revealed that synergies projected for acquisition deals are unattained. People problems and cultural issues were also noted as the most cited reasons in failed integration (cited in Flanagan, et al. , 2004). Barnet (2004) and Lear (2000) agree with Galpin and Herndons findings which cite the clash of cultures of the two firms being combined could be a reason for acquisition failure if the integration is not facilitated well.
Acquisitions fail when acquiring firms do not carefully consider and analyze the culture of the two firms being combined and their compatibility in areas like personality, work styles, integrity, and trust Barnett, 2004).
Barnett, S. (October 1, 2004). Mergers: its a culture issue; Most of the time, the reason behind the merger/acquisition is to reach new clients. The National Public Accountant. Retrieved October 27, 2007 from http://www. allbusiness. com/management/583960-1. html Flanagan, D. , et al. (2004). Merger and acquisition opportunities: due diligence activities offer internal auditors numerous opportunities to help ensure the success of proposed company integrations. Internal Auditor, August 2004, 5559 Lear, R. W. (April 1, 2000). The artic1es of acquisition. The Chief Executive. Retrieved October 27, 2007 from http://findarticles. com/p/articles/mi_m4070/is_2000_April/ai_63609542/ print Mullins, G. E. (2001). Mergers and acquisitions: boon or bane? Central Wisconsin Economic Research Bureau. Special Report, Second Quarter. Retrieved October 27, 2007 from http://www. uwsp. edu/business/CWERB/2ndQtr01/SpecialReportQtr2_01. htm