Acquisition involves a company taking ownership of another business or its assets in a deal that usually involves cash, stock, and/or the assumption of debt. Companies may make acquisitions for a variety of reasons, such as gaining access to new markets, expanding their product offerings, or eliminating competition. Often, these goals can be achieved more quickly and cost-effectively through M&A than through internal growth efforts.

Increasingly, managers rely on acquisitions to redirect and reshape their corporate strategies. Purchasing a business can provide the acquiring company with more market share, products, technology, resources, or management talent than it could achieve through its own sales and marketing activities.

Companies also use acquisitions to increase their productivity and cut costs. For example, when a business acquires a competitor that produces the same product, it can reduce its production costs by utilizing the acquired company’s existing manufacturing capacity and systems. This is referred to as economies of scale and it’s very common in the automotive industry, where companies such as Volkswagen, Audi, and Porsche all share the same platform for their cars.

However, it is important to avoid overestimating economies of scale in acquisitions. For instance, if two large companies operate similar facilities, it is unlikely that the combined company will generate substantial economies of scale, such as lower back-office costs.