Discuss the Drawbacks of Acquisitions Over Internal Development

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The Answer is Firms may find it preferable for several reasons to enter new businesses by means of internal development. First, acquisitions are often more expensive than internal development. Buyers often pay steep premiums for existing companies. In many cases, these premiums outweigh any potential benefits of the acquisition, and in some cases, they make it economically more viable either to enter through internal development or to avoid entry altogether. In short, firms must often decide against entering new businesses because they aren't likely to generate sufficient return on capital to justify the premium cost. In addition, the acquiring firm will often inherit several unnecessary adjunct businesses. An acquirer must either be willing to run these unwanted businesses or go through the administrative hassle of spinning them off.
Second, although acquisitions represent a major one-time commitment of resources, internal development entails incremental investment over time. The internal-development process, therefore, allows for many points at which the project can be assessed and reevaluated before further investment is made. If, for example, economic circumstances change, a firm can pull the plug. Acquisitions, on the other hand, are typically all-or-nothing propositions.
Finally, organizational conflict may emerge as a potential problem; the eruption of cultural clashes can impede the integration of two firms. The process of integration requires significant effort, and firms may encounter setbacks or even failure. Many potential roadblocks can make it difficult for firms to realize economic gains from acquisitions. Taken together, the greater the cost in capital and time, the more synergies managers will have to squeeze out of the deal.

Discuss the Drawbacks of Acquisitions Over Internal Development

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