Using M&A To Increase Capacity For Growth
Some businesses engage in M&A activity to increase their capabilities in R&D or to leverage manufacturing operations. Others wish to increase their market share or gain a competitive advantage. Some need to diversify their products and services while others seek to cut costs. In some cases, it’s a change of leadership which leads down the M&A route, while other companies need investment simply to survive. However, one often-overlooked reason for becoming involved in mergers and acquisitions is to enable companies (or a company) to achieve growth in the future.
Coca-Cola’s recent $575 million acquisition of AdeS – the Argentinean-based soy beverage manufacturer owned by Unilever – is an example of a mega-company reaching out to new geographical markets to expand its presence. AdeS operates throughout Latin America in countries such as Argentina, Brazil, Paraguay and Uruguay, and is the world’s second largest maker of soy-based soft beverages. Despite its relatively small sales volume compared to Coca-Cola’s – AdeS sold only 56.2 million cases of its drinks in 2015 while Coca-Cola sold 29.2 billion – this acquisition demonstrates a desire to grow in diverse and emerging markets, and enhance sales revenue.
In terms of the capacity and capability that M&A can bring to businesses, this is shown by the recent purchase of Home Retail Group for £1.4 billion by Sainsbury’s. Home Retail Group owns Argos and Homebase and its acquisition is designed to enable Sainsbury’s to widen its offerings to create what’s been described as the UK’s ‘largest non-food retailer’, rivalling both Marks & Spencer and John Lewis. Sainsbury’s expect to grow its range of stock, with some larger stores containing Argos outlets, as well as offering online sales piggybacking on the online retail expertise which Argos already has with its Click-and-Collect service.
Companies can increase capacity by acquiring a target that allows the parent company to scale-up its volume through the allocation of assets in a more efficient manner as well as using the target’s capabilities to ‘fill in the gaps’. A harmonious merger, whereby both companies bring complimentary capabilities to the table can also be a way to grow value and increase the potential for future success.
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