At first blush, acquiring another company in the same industry may strike a board of directors as a straightforward way to success and higher income given their depth of industry knowledge and experience, but potential disadvantages abound. Prudent companies will examine all aspects of potential acquisitions, including such disadvantages as a clash of corporate culture and overpaying because of demonstrated industry expertise.
Short-Term Financial Consequences
Despite the assumed cost savings that come along with eliminating duplicative back-office and marketing functions that occur within the same industry, acquisitions still require significant outlay of either cash or company stock and may not be immediately profitable. Companies may decide to proceed with an acquisition for strategic reasons to firm up their competitive position, not necessarily to increase short-term profits, which may cause a decline in stock prices. Any hint of monopolistic tendencies suggested by the merger, however, may draw the attention of regulators and increase legal fees.
Companies that acquire other businesses within the same industry may feel they can raise their prices given the reduced competition, yet consumers may well rebel when confronted by increased costs as they seek cheaper product alternatives within the marketplace. The impetus for innovation may decrease if companies attempt to maximize their profits at the expense of research and development budgets, which would lead to less customer choice and a weaker foundation for future profitability.
Companies may become too set in their ways when they feel that competition no longer aggressively breathes down their corporate backs. Customer service may suffer as employees feel less of an urgent need to go out of their way to help clients and shoppers. The entrepreneurial spirit can also drag when it becomes too satisfied, which can lead to less executive work hours and more time on the golf course. That scenario will eventually catch up with the acquiring company as new businesses emerge to fill market gaps.
Two companies may operate well within the same industry, but have entirely different corporate cultures. One may be more of the buttoned-down, leather-shoe variety, the other boasting a more freewheeling T-shirt and sneakers brilliance. Both have their place, yet integrating such starkly different customs can take months of effort, create ill will and result in layoffs or departures that directly impact the bottom line.