Wednesday, May 22, 2024

Investment

The Predator’s Role in Mergers and Acquisitions

Businessman taking the bait

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The world of big business is often portrayed as being cutthroat. That is not far from the truth. It’s no wonder terms like ‘hostile takeover’ and ‘predatory acquisitions’ exist. Competition can be pretty fierce. It often is, which leads us to the main topic of this post: the role of the predator in mergers and acquisitions (M&As).

The term ‘predator’ has negative connotations. It conjures up images of stronger, more powerful animals preying on their smaller, weaker counterparts. That is essentially what an M&A predator does. It seeks out weaker companies unable to defend themselves and takes them over.

Just like in nature, predation in the M&A space serves a valuable purpose. If predatory acquisitions didn’t exist, the business landscape would look a lot different. Predatory acquisitions may not always look pretty, but they are sometimes better than the alternative.

Who Are the Predators?

In the business world, a predator is a financially strong company with enough of the right connections to make acquisitions at will. A key characteristic of successful predators is solvency. Simply put, succeeding in the role of predator requires liquid assets. It requires the ability to not only absorb a weaker company, but also assume its risks and liabilities. A company cannot do that if it is not solvent.

Note that predators, while they may conduct hostile takeovers, are not necessarily hostile all the time. In fact, many hostile takeovers are actually negotiated by the two parties. They are only considered hostile because the acquired company (the prey) wasn’t originally looking to sell. The predator initiated the deal.

How Do Predators Operate?

The standard predator MO is one based on aggression. Predators don’t wait for good deals to come to them. They go looking for them. Like a lion hunting for gazelle on the African plain, a business predator constantly scans the horizon looking for companies to buy up. And like the lion, predators look for weak companies who are unable to put up much of a fight.

When the prey is found, the predator typically swoops in and expresses interest in an acquisition. In most cases, the first phase of due diligence is performed before an offer is made. Once the offer is accepted in principle, a second round of due diligence is performed.

Mezy, a Springville, Utah company that specializes in due diligence as a service, explains that predators may not be as concerned about all aspects of due diligence as other companies. As predators, they are already willing to assume a lot of risk in order to make a deal.

Why Do Predators Do What They Do?

Predatory acquisitions are inherently risky simply because predators are acquiring weaker companies that may be suffering financially. So why do it? What is in it for the predator?

Predators do what they do because they see great potential for profit. It’s a high risk, high reward sort of thing. The potential for profit is so great that they are willing to risk a loss on the outside chance that things don’t work out. It is really no more complicated than that.

In closing, it’s important to explain the valuable role predatory acquisitions play in managing the business landscape. Predation is beneficial in the sense that it absorbs weaker companies that would likely not survive otherwise. By acquiring other companies, predators have the opportunity to continue employing workers and serving customers. That doesn’t always happen, but the potential is still there.

Predatory acquisitions are part of the business landscape. Despite the negative connotations, predation is not always a bad thing in business. As in nature, it is often a good thing.

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