Risk reduction by diversifying portfolios
Private equity firms and investment funds often reduce risk by acquiring a company in a different industry, enabling them to diversify their portfolio. For example, investors who had travel businesses as a part of their portfolio saw this industry struggling during the initial years of the pandemic. For investors with diverse portfolios, better performance in other sectors, such as tech-enabled or digital services, offset the struggling businesses.
Value chain integration
Sometimes companies prioritize select value chain elements over revenue and profit. By acquiring a company with complementary value chain elements, an integrated company may reap additional benefits by expanding its presence across the entire value chain. For example, a cannabis company focused on researching, cultivating and processing a product might decide to acquire a player with strong distribution capabilities to bring its product directly to the end customers.
Improved brand reputation
Access to new markets
Cross-geography deals enable companies to access new markets. These markets can be based on global or regional presence or different client segments, such as a commercial insurance provider entering a small business insurance market. Access to new markets will usually drive sales and increase revenue.
Access to new channels
When a company is limited to select channels and wants to increase its reach, it can seek a merger with or acquisition of a company specializing in other channels. This enables the integrated company to use a wider range of channels to reach a broader customer base. The combined entity will be able to better cater to the preferences of different demographics by unlocking access to new customer segments.
Access to new vendors
Access to new, better vendors is another benefit of mergers and acquisitions. The acquiring company can leverage an acquired company’s established vendor relationships across the entire integrated company. In some scenarios, both companies might be too small to work with a particular vendor independently, but as an integrated company, they can do so. In addition, access to trusted vendors is valuable when entering new geographies and markets.
Access to best practices
Considering the acquired company’s best practices is important when building an integrated operating model. Access to an acquired company’s best practices is a significant benefit of mergers and acquisitions. These best practices can relate to onboarding employees, supply-chain management processes, a superior CRM system, a more efficient and effective decision-making approach, or other areas. Research and development, sales and marketing, operations, HR, and finance all have best practices that could benefit an integrated company.
