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Should acquisitions focus on more than simply earnings growth?

It is only natural that when two companies in New Jersey are considering an acquisition that they each expect for the venture to bring financial success. However, according to some, when a company is looking into the possibility of acquiring a new business, focusing on cutting costs or focusing on increasing financial revenue may not always mean the acquisition will be a success.

Let's first focus on cutting costs to save money. For example, when two companies merge, they may close one of their facilities along with its staff members. But, some say that companies often overestimate how much they will actually save. Moreover, cutting costs may come at the expense of customer care and service, which could lead to a loss in profits.

Now let's focus on increasing revenue. Many times, when it comes to a large acquisition, it is believed that there will be substantial growth through cross-selling. Again though, some say that companies often overestimate how much cross-selling will benefit them. In general, if the two companies' products and sales territories are doubled, it may make it difficult for employees to know how best to offer the new products or services obtained via the merger to current and potential patrons.

When a company is considering acquiring another company, the acquiring company may be tempted to base the acquisition on the potential sales and profits. According to some, it is important to look at the company's balance sheet, to understand how the company tracks their capital. If, through an acquisition the managers want to see an uptick in their company's value, they cannot underestimate the financial profitability of their patrons. In fact, according to some, the value of a company is truly based on the value of their patrons. It may be able for a company to develop a means for making unprofitable patrons profitable. In the end, an acquisition may be most beneficial if it is done with the purpose of creating share-owner value via its patrons.

As this shows, while it is important to consider profits when undergoing an acquisition, it may also be important to examine the company's balance sheet and assess the value the customer's patrons bring to the venture. After all, there are many aspects of running a successful business -- profits are only one of them.

Source: NBR.org, "M&A Needn't Be a Loser's Game," accessed on July 5, 2016

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