Acquisition is basically a transaction between the promoters/ shareholders of a company and other investors/ corporates, where the corporates buy majority of the shares, or at least a percentage of shares that allows them to get management control. Companies acquire new companies for various reasons which could be – access to better technology, access to a great product portfolio, eliminating competition, access to newer markets, etc. Acquiring an existing company in a foreign market is one of the oldest ways to grow a Corporate’s footprint globally. Let’s take a recent example.
IBM, one of the largest corporations in the technology space, acquired Red Hat, a major distributor of open source software and technology for $34 Billion. The deal has been rated as one of the biggest acquisition in the history of technology deals. Red Hat’s stock price was at US $116.68 before this acquisition. IBM will pay US $190 for each share of Red Hat – a 63% premium on the market value of the listed company.
Mergers and acquisitions are a part of IBM’s growth strategy. The acquisition helps IBM expand far beyond its core business. Cloud is one of the four key strategic elements of IBM. The other three are mobile, analytics and social. Google, Microsoft, and Amazon are growing rapidly in the cloud infrastructure business. With this acquisition, IBM is hoping to leverage the strengths of Red Hat and catch up with Google, Microsoft and Amazon’s cloud infrastructure business.
This acquisition will help IBM in various ways for their cloud business expansion.
Ø IBM is getting a strong profitable organization, which has a great history of selling open source software and other cloud infrastructure applications.
Ø IBM gets a talented team of employees who are experts in software design and development.
Ø This acquisition will help IBM gain access to a large market that it was not serving earlier. It can now sell its products in geographies where it was absent. It can also sell its existing products to new clients in multiple countries across the globe. This is going to be a huge boost for IBM’s revenue and profitability.
Ø IBM shares have lost almost one-third of their value in the last 5 years. Red Hat’s shares are up by 170% in the same period. This acquisition will surely help IBM to create value for its shareholders.
Ø The biggest advantage, for IBM, is their ability to compete with the big players of the cloud business – Google, Amazon, and Microsoft.
Acquisition is an important and critical driver of growth for any serious corporation. A lot of us don’t know that YouTube was acquired by Google for $ 1.65 Billion in 2006. Although it seemed expensive at the time, the revenues have justified the buy. YouTube has earned almost $4 Billion in revenue for Google in USA, in 2018. Google has spent over $23 Billion on acquiring over 140 companies across the globe, in order to gain access to markets and technologies that were necessary for its growth and profitability.
It is important to consider all the important factors before acquiring any company. If the acquisition is done without proper planning and weighing all the liabilities it may lead to losses and bankruptcy. The acquisition of Corus by Tata Steel is one such example. The steel manufacturer, Corus, had most of its factories based in EU – which has laws in place, that make it very difficult to close loss making units. This forced Tata Steel to merge its EU units with ThyssenKrupp, another large steel manufacturer, with the hope of turning around its loss making units.
Mergers and Acquisitions have for long been rated as the best way to grow an organization and multiply profits and it shall continue to be so. This is a major reason why Investment Bankers continue to prosper even in a tough economy. Deal making is the toughest and the most rewarding task that finance executives do. Investment bankers are paid a certain percentage of the deal value that they execute. This is what makes Investment Banking one of the most attractive career options for any finance executive.
Learn more about mergers and acquisition with BSE Institute’s GFMP program. The course prepares students for this highly competitive industry which continues to flourish and offer the highest salaries in the World. Students can easily target large pay packages right after this course.