A quick look at the M&A history reflects the fact that out of the total number of mergers and acquisitions taking place in the corporate world, only 20-25% of them manage to create wealth for the shareholders. Such value creation happens often due to related acquisitions.
As mentioned in the definition, the acquiring firm tries to seek relatedness in at least one of the four different domains.
Business: targeted firm works in the similar market or industry; knowledge is transferred from older company to the newer one; helps in reduction in competition and increase market share
Size: targeted firm is of similar size of the acquirer; leads to better knowledge integration; helps in identifying and reducing redundancies (like duplicated workforce etc)
Technology: targeted firm looks for always looks for technological updates which is in line with that of the acquirer
Culture: targeted firm’s culture is similar to that of the acquirer; brings similarity in decision making, behavioural norms; avoids misinterpretation of motives and intentions which reduces interpersonal conflicts
Related acquisitions manage to create value for the organization due to:
Economies of Scale: Organizations are able to better utilize the available resources in all functional areas which increases productivity
Economies of Scope: Because of the extended collaboration, the organization can share its resources for producing more than one product thus generating economies of scope
Market Power: Related acquisitions lead to weakened competition which helps an organization to consolidate its presence and expand its market share
e.g.) An automobile manufacturing company acquiring a tire manufacturing company is an example related acquisition.