Introduction
In the contemporary business world, strategy is of essence when carrying out business activities. The main aims of strategies are to enhance profitability of a company, competitive advantage in the market, market share, and most importantly, to increase shareholders’ fund. There are a number of strategies which can be employed.
Examples are merging with other companies, acquiring other companies, conglomeration, and franchises among others. Besides, there can be strategies that relate product or system overhaul, change in staffing of the company, restructuring of assets, and change in structures of the company (Hitt, Ireland & Hoskisson, 2009). Management of a business should be strategic to ensure that the business attains its strategic goals.
They should respond to various changes in the market. Market is dynamic. Therefore, businesses have to be dynamic. Acquisitions are “takeovers in which the bidder negotiates directly with the target company’s board of directors. The purchase can be based on a consideration of cash, paper, or a combination of the two” (Hitt, Ireland & Hoskisson, 2009).
The fundamental goal in developing an acquisition strategy is the minimization of the time and cost of satisfying needs. This treatise discusses how a company can use acquisition strategy to enhance performance. It will look at two companies in different industries.
Thesis Statement
Acquisition strategy enables companies to strengthen their market position. Further, it enables an entity to increase asset base, enhance competitive advantage, diversify its products, spread operational risks, and explore new markets.
Rio Tinto Group
Rio Tinto Group used acquisition strategy to expand product line and market. Formation of the company was in late 1870’s. The group is the fourth largest mining company in the world. It is listed in both London Stock Exchange and Australian Securities Exchange. Profit for the year 2010 amounted to $15,184 million while the total assets amounted to $112,402 million.
The main business of the group is processing minerals such as copper, coal, aluminium, and borax among others. Since its formation, the company had concentrated on production of copper. The business thrived until the First World War. The World War affected the relationship between the US and Europe.
Therefore, the profitability of the company went down. The management had to come up with strategies of increasing profitability of the group. One strategy was acquisition. In 1930, the group made its first acquisition that was, Rhodesian copper mines.
This acquisition enabled the company to prosper during the world war. After acquisition of Rhodesian copper mines, the group acquired U.S Borax in 1968. Other acquisitions included Kennecott Utah Copper, BP Australian Coal, NSW operations of Coal & Allied Industries (which produces coal), Nerco, Northern Limited, and Cordero Mining Company (the two produces coal).
The latest largest acquisition was Alcan Incorporation. This acquisition amounted to $38.1 billion. Incorporation of Alcan was in Australia. It specialized in production of aluminum. Currently, the group has over 35 subsidiaries located across the world. In addition, there are more takeovers, acquisitions and merger negotiations that are ongoing. After formation, the group produced copper only.
Also, it was serving a small market. Through acquisition, the company has been able to diversify its product. For instance, the acquisition of Alcan enabled the Group to be listed in Australian Securities Exchange. It also enabled the group to expand production of Aluminum. Acquisition of US Borax enabled the group to produce Borax. Finally, acquisition of coal companies helped the group to venture into production of coal.
Secondly, the group has been able to expand the market share. Currently, it has presence in all continents. Further, the asset base and competition edge of the group have enormously improved this is because assets of the acquired businesses are brought into the books of account of the group. Finally, the strategy enabled the group to spread risks that arise from international trade (Hitt, Ireland & Hoskisson, 2009).
In 1930, the group made its first acquisition, that was, Rhodesian copper mines. This acquisition enabled the company to prosper during the world war. After acquisition of Rhodesian copper mines, the group acquired U.S Borax in 1968. Other acquisitions included Kennecott Utah Copper, BP Australian Coal, NSW operations of Coal & Allied Industries (which produces coal), Nerco, Northern Limited, and Cordero Mining Company (the two produces coal).
The latest largest acquisition was Alcan Incorporation. This acquisition amounted to $38.1 billion. Incorporation of Alcan was in Australia. It specialized in production of aluminum. Currently, the group has over 35 subsidiaries located across the world. In addition, there are more takeovers, acquisitions and merger negotiations that are ongoing.
After formation, the group produced copper only. Also, it was serving a small market. Through acquisition, the company has been able to diversify its product. For instance, the acquisition of Alcan enabled the Group to be listed in Australian Securities Exchange. It also enabled the group to expand production of Aluminum. Acquisition of US Borax enabled the group to produce Borax.
Finally, acquisition of coal companies helped the group to venture into production of coal. Secondly, the group has been able to expand the market share. Currently, it has presence in all continents. Further, the asset base and competition edge of the group improved.
This is because assets of the acquired ventures are brought into the books of account of the group. Finally, the strategy enabled the group to spread risks that arise from international trade (Hitt, Ireland & Hoskisson, 2009).
Capital Synergies, Inc.
It is a national insurance brokerage firm specializing in wholesale distribution of various insurance products. Some of the products include traditional and variable life insurance, long term care insurance and annuities. Formation of the company was in 1999. Thereafter, it started an aggressive strategy of acquisition and merger in the life insurance brokerage and distribution channel.
The acquisitions it made included benefit brokerage, Inc., Total Life Concepts, Inc., and Security House, Inc., among others. Use of acquisition strategy led to growth in revenue, reduction in operating expenses, and scale based marketing opportunities (ProQuest LLC, 1999).
Conclusion
From the above comparison of companies in different industries, we can deduce that acquisition strategy enables companies to strengthen their market position. Further, it enables an entity to increase asset base, enhance competitive advantage, diversify its products, spread operational risks, and explore new markets.
Therefore, strategy is necessary for growth and success of the business. Strategies help in improving the profitability of the company and hence the shareholders return. However, a parent company has to be strategic during acquisition. It should consider acquiring companies that would have a long term impact on the company.
References
Hitt, M., Ireland, D., & Hoskisson, R. (2009). Strategic Management: Competitiveness & Globalization, Concepts, USA: Cengage Learning.
ProQuest LLC (1999). Acquisition strategy. Web.