Acquisitions - Why?

According to a study called "Why are companies bought and sold in Spain?", jointly published in 2000 by Instituto de Estudios Económicos (the Economic Research Institute) and Closa M&A, the Spanish companies that embarked upon a purchase of another company over the last decade did so for as many as 40 different strategic, financial, organizational and commercial reasons.

Most of the reasons mentioned in the study are related to one another as some are consequences of others. However, one of them substantially covers the various reasons that lead different Spanish companies to grow by acquiring other companies: value creation.

This reason subsequently manifests itself in very different ways in each case: access to certain kinds of technology, vertical integration in order to become more competitive, market leadership, investment in liquidity, opportunism, diversification in order to reduce shareholder risk, expanding internationally, achieving economies of scale, a defensive measure against the concentration of clients, a defensive measure against the growth of the competition, to avoid hostile bids from other companies, developing complementary markets, tax reasons, etc.

Companies have to be competitive if they want to survive and continue to serve all  parties involved. This recognizes that the long-term success of a company depends on a financial relationship with each party involved. Employees look for competitive salaries and other benefits. Clients want quality products and services at competitive prices. Suppliers and lenders want financial commitments to be met on their due dates. In order to satisfy these demands, the company must generate enough liquid assets through efficient management of the business. This emphasis on long-term cash flow is the essence of a company's value. Thus, when a company creates value, it not only does so for its shareholders but also for all parties involved. When purchasing companies as a means of generating long-term sustainable value, one must take into account this complex situation of different interests.

People often used to mistakenly think that acquisition-driven growth was only for large companies and that medium-sized companies (especially small ones) were condemned to vegetate in the market waiting to be swallowed up by a larger competitor or disappear due to lack of size in a competitive environment. This opinion was based on a belief that the limited investment potential of medium-sized companies only allowed them to go for strong organic growth. However, the development of the capital markets and the existence of fragmented markets has given rise to concentration processes led by medium-sized companies with the support of financial investors.