The most common reasons for making an acquisition include holding on to a premium position or cutting costs. But to realize those benefits, the acquirer needs to achieve economies of scale by absorbing the target’s resources into its operations. CEOs, who are often unrealistic about the performance boost from such acquisitions, must be sure not to pay too much for them.
A less-familiar reason for making an acquisition is to fundamentally change a company’s growth trajectory. In those deals, the acquirer uses the target’s business model as a platform for growth. Because the business models with the most transformative potential are often disruptive, they can be difficult to evaluate, and CEOs often believe that such acquisitions are overpriced. In fact, however, those are the ones that can pay off spectacularly.