Application of Business Acquisition to Expand a Business Based on the Case Study: Acquisition of Somerfield by Co-Operative Group
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Application of business acquisition to expand a business based on the case study: Acquisition of Somerfield by Co-operative group
Background:
Business acquisition is one of the most vital tools to expand an existing business effectively. An acquisition takes place when an existing company buys another company which has more or less similar operating activities and ended up controlling it. It is clearly different from merger which is the integration of a business with another and sharing the control of the combined businesses collectively. Mergers and acquisitions (M&As) have long been considered as an one of the most highly appreciated method to achieve the desired growth rate and satisfying the key stakeholders. With rapid advances in science and technology competition for the same marker has increased significantly and to remain competitive in the market business organizations have considered M&As as an imperative strategic tool. Rising of new financing promises and changes in regulations have made M&As even more popular to create new market, maintain the existing market and acquiring unique technologies and intellectual properties. However, despite being considered as a pivotal business strategy to achieve target growth the general consensus is that more than eighty percent of the M&A fail to reach the desired financial goal (Nahavandi and Malekzadeh 1993) and fifty percent simply become unsuccessful (Cartwright and Cooper 1995; Child et al. 2001, Sally Riad. 2007).
Although M&As have a high failure rate as suggested by previous results careful planning practices can increase the chance of their success. Although there is no rule of thumb that suits all situations in order to make a successful acquisition one must follow a few basic rules. Any purchaser no matter how the size of the company is must first determine what strategic aim are they planning to achieve through acquisition. They should also consider what financial benefits will be realized if the aims are achieved. Any chances that the aim will not be achieved should also be taken into consideration before making an acquisition. One of the major advantages of acquisition is that it is quicker and easier than other strategic alternatives and in order to make an acquisition work business also need to calculate the amount of time that will be required to integrate and obtaining the benefits won by the acquisition.
In this study whether acquisition can help to expand a business will be analyzed based on the case study of the acquisition of Somerfield by Co-operative group. Co operative is now the fifth leading food retailer (7.9% market share) in the UK which operates 3,300 stores of various sizes and has the maximum geographic reach compared to other food retail giants. As food retail business was becoming highly competitive with market dominated by giants like Tesco, ASDA and Sainsbury etc. Cooperative took a strategic decision to expand its business and double its profits over a period of three years by acquiring Sommerfield in 2008 at a value of £1.57bn ($3.1bn).
Literature Review
Acquisition has been in existence since at least 1900s and have been increasingly considered as a popular strategy for firms for strategic expansion. Business acquisition can be defines as a strategy to obtain the desiref growth by increasing the number of stores in which customers can buy the prodict or service of a company or by introducing new product or services in the market. Growing a business traditionally can a very long time while business acquisition can ignite the process of expansion. Increased competition for the same market significantly augmented the tendency of business organizations to exploit the competitive advantage that can be secured by acquisition as suggested by the fact that acquisitions completed alone in 1997 valued more than all the acquisitions completed during the 1980s (Hitt et al., 2001a,b).. Worldwide M&A activity has increased significantly over the past few years as suggested by a M&A activity of $1.95 trillion in the year 2004 which represents an increase of 40% since the year 2000 (Thomson, 2005). This is a significant growth in activity considering that research has revealed historically, approximately half of the M&A activity have been proven unsuccessful (Covin, Kolenko, Sightler & Tudor, 1997; Gadiesh & Ormiston 2002; Gadiesh, Ormiston & Rovit 2003; Kaplan 2002; Stanwick & Stanwick 2001; Weber, Shenkar & Raveh 1996; Schneider 2003). Managing the process of acquisition correctly is the major challenge to make an acquisition work. A number of different factors that ranges from setting well defined goals to look for circumstances under which it will make sense to walk away must be carefully considered to make a successful acquisition. In order to carry out an acquisition activity one must first understand whether the business is ready for it. A SWOT (strengths, weaknesses, opportunities and threats) analysis can be carried out to assess the condition of the business as it might give a clear direction about how to take maximum advantage of the strengths, resolve weaknesses, exploit opportunities and avoid threats. Another way to understand whether the business is ready for an acquisition is to carrying out a strategic gap analysis. This involves identifying where the business stands now where one wants to see it after a defined period of time. By identifying the gap between the two one can decide whether acquisition is well enough to bridge the gap. However the extent of planning and research that can be done before making an acquisition decision does not always prove to be enough as situations outside of control may arise and one has to be prepared for these risks. Degree of uncertainty and the time and effort that are spent for the deal can in effect damage the performance of the business. The major pitfalls that may occur following acquisition of a business are:
The performance of the target business is lower than expected
Key people of the target business leave following the acquisition and join another rival business.
The cultures of the two businesses are