Why do companies make acquisition?

Today Coca-Cola is announced to buy Costa Coffee from Whitbread in a £3.9bn deal. Costa is a coffee chain which has more than 2400 shops in the UK and 1400 in more than 30 international markets. Previously, the parent company of Costa Coffee, Whitbread, announced to spin off Costa in April under the pressure from hedge funds. This is not the only merge story. In addition, AT&T’s acquiring Warner Media (Time Warner Inc. formerly) is another big story, AT&T is the world’s largest telecommunications company while Time Warner is a multinational mass media and entertainment producer, who owns CNN, DC Comics (batman), Warner Bros., HBO (the Game of Throne).  In addition, the tech giants are big players conducting acquisition. Alphabet has acquired DeepMind for its AI development; Apple has acquired Akonia Holographics, which is a holographic smart glasses producer, leading to people’s expectations of coming Apple Glasses.

Acquisition has these several functions. Firstly, acquisition can avoid potential competition from rising start-ups. There are many start-ups with huge potentials which are possibly challenging large players in their fields; however, since start-ups all face high risk, they have the incentives to be acquired by large companies, and give themselves more secure growth environment, so many of the start-ups will not resist being taken over as long as the prices are right. Secondly, acquisition can boost a company's growth in new fields. Large companies are good at what they are doing in their own fields but they can be new to some fields which they are not familiar with, especially when the fields themselves are new as well. By buying an existing in the new field, the large company can immediately boost its ability and competitiveness in this new field. For example, once Alphabet acquired DeepMind, it immediately boosted its development in the AI field. Thirdly, acquisition can allow companies to expand to other fields and create diversity for their business structures. Diversity can prevent a firm from being too vulnerable to several particular systematic shocks. Fourthly, acquisition can improve firms improve their tax efficiency, especially when the investment is wise. In some countries, companies are able to use investment including acquisition to subtract taxable profits in order to lower the amount of taxes paid to the government. Fifthly, companies have lots of cash and their targets are cheap. For example, there are talks about the possibility of Alphabet or Apple's acquisition of Tesla if Tesla does not reach profitability by 2019 and its market cap falls sharply, as Alphabet and Apple are both cash rich companies.

To conclude, there are various reasons of why companies acquire other companies, but the main purpose of any acquisition is to maintain a company's competitiveness and long term profitability.