Motives and Advantages of Mergers and Acquisitions Versus Strategic Alliances: Selecting the Best Route for Your Business
In today’s business world, inorganic growth has been considered one of the most powerful approaches to enhancing an organization’s effectiveness and sustainability. Over the past years, we have witnessed a sharp upheaval in the number of organizations choosing inorganic growth strategies such as mergers and acquisitions (M&A) and strategic partnerships.
Strategic alliances and M&A have been especially popular in the professional services industry in recent years because of the expanding tide of retiring Baby Boomers and a constantly changing economy and marketplace. The benefits and advantages of both strategies include a greater market share, increase survival rate in the industry, amplify market power, diversify labor and skills across industries. The successful activities of M&A and strategic alliances demonstrates that both are essential organizational instruments that give significant benefits and advantages to companies.
Executives considering these two approaches may wonder about the benefits of embracing either approach. This article will serve as an additional resource for companies and executives aiming to implement an inorganic growth strategy. It will provide a brief overview of each strategy’s motives and advantages which will assist in the selecting of the approach that may be an excellent fit to accelerate growth and create opportunities.
Motives and Advantages: Mergers and Acquisitions (M&A) and Strategic Alliances
Motives of Mergers and Acquisitions
The main motives for mergers and acquisitions can be divided into four categories. These factors are strategic motives, financial motives, managerial motives, and acquisition wave motives. Strategic motives are often associated with strengthening the firm’s competitive advantage through consolidation, increased capabilities, or expanding the firm’s presence in new or current markets, products, or geographical regions. Financial motives are relevant to optimizing the use of a firm’s financial resources by taking advantage of tax advantages, asset stripping and unbundling, or boosting economic performance. Managerial motives encompass any self-serving or hubristic objectives that serve exclusively the interests of managers rather than the interests of shareholders. Acquisition wave motives include the occurrence of acquisition booms and busts in highly cyclical markets and the prevalence of bandwagon effects.
Advantages of Mergers and Acquisitions (https://www.indeed.com/career-advice/career-development/mergers-and-acquisitions)
● Improved economic scale
A larger business, or one that has joined forces with a smaller business, will typically have higher needs in terms of materials and supplies. By purchasing the necessary raw materials and/or supplies at higher volumes, the collaborative effort of the merger or acquisition will improve the company’s scale through lower costs and those lower costs will now potentially pass on to the end consumers.
● Lower labor costs
A merger or acquisition may result in multiple staff members doing the same job at each individual company. By coming together and eliminating extraneous staff, a business can reduce its overall labor costs while maintaining a stronger, more effective labor force. Those involved in the M&A may review the performance of individuals in similar roles and choose the best talent for each position in the new company.
● Increased market share
When two companies come together that operate in the same industry or provide similar goods or services, the newly formed company can enjoy a greater market share, tapping into the resources that both bring to the business deal.
● More financial resources
Companies involved in a merger or acquisition pool their financial resources, increasing the overall financial capacity of the newly formed company. This creates new investment opportunities for the company, as well as allow the company to reach a wider audience with a larger marketing budget and more significant inventory capabilities.
Motives of Strategic Alliances
Several factors may be discerned when studying the motivations for investing in strategic alliances. These factors are access alliances, complementary alliances, collusive alliances, and scale alliances. Access alliances are primarily concerned with acquiring access to the capabilities of a partner company. Complementary alliances are similar to access alliances in some ways, but they differ in that they focus on improving a business’s shortcomings with the strength of a partner firm. Collusive alliances are utilized to enhance the partner businesses’ market dominance. Lastly, firms participate in scale alliances to pool resources to gain the benefits of economies of scale.
Advantages of Strategic Alliances (https://www.workspan.com/blog/strategic-alliance-definition/)
● Sharing resources and expertise
A strategic alliance will combine the best both companies have to offer. This can be a deeper understanding of the product, sales, or marketing knowledge, or even just more hands on deck to increase speed to market.
● New-market penetration
A strategic alliance gives access to new markets with a solution that wouldn’t have been possible for either company on its own. For instance, companies going global often work with a trusted local partner to get an advantage in an emerging market.
● Expanded production
When it comes to manufacturing and distributing products, strategic alliances allow partners to increase their capabilities and scale quickly to meet demand.
● Drive innovation
With the right alliance, partners can outpace the competition with new solutions that are a complete package for their customers. These alliances are creative and revolutionary and change the market landscape in a dramatic way.
In conclusion although both approaches are crucial instruments for a company to survive and should be among its core competencies if a firm wants to develop quickly and efficiently in an increasingly competitive market, Strategic Alliances have an easier pathway or process of entry for companies venturing into this field for the first time. In a way Strategic Alliances can be seen as or can the courting period before a couple makes a full commitment of marriage – M&A. Strategic Alliances allow partners to scale quickly, build innovative solutions for their customers, enter new markets, and pool valuable expertise and resources especially in a business environment that values speed and innovation. But at the end of the day the decision of which strategy to pursue lies with the company and is entirely dependent based upon their business goals and objectives. Companies willing to adapt to these approaches must plan carefully with their key executives to identify the right strategy, recognize objectives, negotiate agreements, undertake due diligence, and deal with any challenges that may develop. The overarching goal is to choose the perfect strategy or solution that would ultimately benefit the company’s future success.
Ready to explore your exit and growth strategy?
When considering your next step with your firm, whether a strategic alliance or M&A HWA Alliance of CPA Firms, Inc. (HWAA) offers business owners convenient, creative, and value-maximizing solutions for developing and exiting their firms. HWAA has decades of Alliance and M&A expertise, working with different offices and organizations, and we have helped many business owners achieve their personal goals to exit while assuring their firms’ future growth. Our goal is to maintain your legacy by strategically positioning your firm to continue doing business under the umbrella of HWA Alliance. Let us help you, as “Partners” we can expand into new markets, add complementary goods and services, gain access to new technologies, and, most importantly, protect your legacy through overall growth and success.
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