As we have noted in prior posts, the trend of a strong market for mergers and acquisitions is expected to continue in 2016. The latest increase in interest rates will likely have an adverse effect on transactions in the short term. With that, companies that look to strengthen their market positions through acquisitions must still scrutinize deals so that they make sense both in the short term and the long term.
Part of that due diligence means that potential acquisitions must fit one of a few rationales that business consultants have found to be part of successful transactions.
Improvement of company performance – This rationale focuses on acquisitions that will help a company reduce costs, improve margins, operate more efficiently, or achieve a combination of the three.
Reduce competition – Naturally, a business is poised to do better in the marketplace with fewer competitors; especially those that are being threatened by up-and-coming enterprises.
Increase visibility and customer access – As well as small companies do with cultivating new products and ideas, they may have little value unless customers know about them. As such, partnering with, being bought by, a larger company may increase a small company’s bandwidth and market share at the same time.
While executives may think that a potential acquisition will achieve one, or a few of these goals, it is prudent to have a professional legal opinion on how the transaction will actually work given the responsibilities and burdens each company must deal with. After all, what may make sense in theory may not do so in practice.