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What Are Strategic Acquisitions?

Melissa Barrett
Melissa Barrett

Strategic acquisitions are purchases by a company for reasons other than immediate profit potential. Reduction of operating costs is often a motivator as is the future potential of an underexposed market. In the business world, these acquisitions often take the form of mergers and corporate buyouts.

The most publicized use of strategic acquisitions is to eliminate competition. In cases when the purchased company is then closed, these takeovers can result in lost jobs and disturbances in local economies. Without competition, the prices of these consumer goods or services are also likely to rise.

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Luckily, most acquisition strategies do not require that the competing company be closed. Frequently, only the ownership of the company changes, and the business continues to function as usual. The product remains the same, thus it retains its customer base. The purchasing company eliminates the financial losses of competition by essentially becoming their own competition.

At times, it is more practical to acquire an existing business in a certain locale than it would be to start up new operations in that area. Potential acquisitions of this type are often businesses that are closely related to the purchasing company. With the purchase, an organization gets not only the tangible assets and brand of the company but also an established customer base through which to market its own products.

In the manufacturing industry, strategic acquisitions are usually used to gain access to raw materials. For example, furniture makers usually require lumber. When buying lumber, the company is assuming both the cost of the timber and the profit margin of the lumber manufacturer. By purchasing a lumber mill, the furniture maker can increase profits by reducing expenditures rather than increasing sales.

Likewise, strategic acquisitions can grant access to technological developments. Organizations operating in high-tech fields regularly rely on outside consultants or developers to provide new products or product improvements. Unfortunately, much of this information is frequently available to competitors as well. On their own, research facilities usually struggle to keep financially afloat. Their potential to provide proprietary information on technological advances, however, makes their purchase attractive.

Historically, strategic acquisitions of small businesses within a rapidly growing field have proved profitable. Strategic investments of this kind generally experience small profits or even losses in the short term. As the field grows, however, these initially small companies can be seen as pioneers. As such, they enjoy substantial growth through brand recognition and established customer loyalty.

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