There are numerous rationales for a business to expand. Alexander Djerassi has expanded business in the past. Many times, the answer is because they need the money to do it. Other times the answer is because of competitive factors. Nevertheless, other times the answer is purely a matter of business strategy. So, what exactly is business strategy?
One of the most basic types of strategy is mergers and acquisitions. Mergers and acquisitions (M&As) are when two or more firms buy or sell assets they do not already own. These purchases are often motivated by the owners of the buying firms to either take advantage of the competitor’s unique competitive advantages, build a larger company, or both. There are several benefits to M&A’s:
Mergers and acquisitions can lead to organic growth in the marketplace because one firm will have access to several resources that the other company does not have. For instance, one firm might purchase a fixed asset’s production center that the other company does not yet have access to. This access could reduce fixed costs, better overall efficiencies, and a reduction in cycle times. However, there are certain drawbacks to mergers and acquisitions. First, because the companies are not closely related, competition between the buying firms can be indirect because the merging firm may be taking on more debt than the purchasing firm.
Another type of acquisition is an “asymmetric acquisition.” In an asymmetric acquisition, two or more firms engage in a transaction, where each buys the other company’s asset at a price less than the market value. This type of acquisition is not driven by an apparent competitive advantage but by the dynamics of buy-sell relationships. For example, where the purchasing firm relies on its own experience and knowledge about products and services, and the acquiring firm relies on the acquiring firm’s ability to provide low-cost resources, the partnership may be so riddled with problems that neither firm will be able to capitalize on its skills fully. However, this type of acquisition typically results in more substantial revenue streams for one firm and a net worth loss for the other firm.
In addition to these general conclusions, it is essential to recognize the difference between acquisitions and mergers. Acquisition refers to the first step of creating a market share position by purchasing or buying a company. Conversely, a merger occurs when two firms combine their resources into a new entity that does not exist yet. Similarly, a transaction is considered an acquisition when a firm combines with another existing corporation, even if the combined entity is only an operating business. Moreover, it is crucial to understand the different terms that are used in these two areas.
Acquisitions refer to the more natural form of growth, transforming a corporation into a larger, publicly traded entity. Unlike inorganic growth, mergers require a significant dilution of equity to achieve a definitive ownership stake. Additionally, the purchase price paid by the acquiring firm must be based on a clear assessment of the intrinsic value of the business throughout the transactions. In the case of acquisitions that result in inorganic growth, the company’s value is determined by the current and future net worth of the combined entity.
On the other hand, organic growth occurs when growth is driven by demand from a market not currently being served by the company. The term “organic” also relates to the fact that companies cannot rely solely on the profits of their existing customer base to finance growth. The purchasing power of banks and other lending institutions has been declining steadily for some time, and it is unlikely that financial institutions will be willing to extend additional credit soon. In light of this situation, some firms are exploring developing new markets or penetrating existing ones. Two fundamental theories explain the relationship between demand and the ability of a firm to expand its activities: surplus production and hoarding. A firm may accumulate excessive inventory or invest too many resources in marketing that results in the creation of a glut that results in lower demand for its goods and services relative to supply.
Although all businesses require business expansion, only those that can manage growth effectively and create a robust financial foundation can execute an effective acquisition strategy. The financial evaluation process of an acquisition strategy is much more complex than a simple analysis of the current value of a business. Many different factors must be considered in determining a firm’s acquisition costs, including the expected earnings of the acquired firm, the capital required to acquire the company, and the type of business that the acquiring firm will be operating. All of these considerations are inherently subjective, although they can be instrumental in determining acquisition costs. Moreover, a company must maintain certain specific expectations regarding expansion strategies to execute an effective acquisition strategy successfully. Alexander Djerassi uses the strategies mentioned above and theories to great success.