DEFINITION: The term “acquisition” refers to the purchase by one company of a majority (or total) share in another company’s stock, thereby ending the latter’s existence as an independent entity.
By owning more than half of a target company’s stocks and other assets, the acquiring company becomes entitled to manage the assets of the acquired company without consulting the latter’s management team.
ETYMOLOGY: “Acquisition” is derived from the Middle English acquisicioun, via Middle French acquisition and ultimately the Latin noun acquisitio, derived from the past participle, acquisitus, of the verb acquirere.
USAGE: Acquisitions are a routine in the business world and may take place with or without the acquired company’s consent. When the acquired company approves the purchase, the process usually includes a no-shop clause—an agreement that prevents the acquired company from getting an offer from another potential buyer.
While acquisitions involving large, well-known companies often make the newspaper headlines, small and medium-sized companies in fact make up the majority of mergers and acquisitions (M&A).
Firms purchase other businesses for a host of reasons. They may be hoping to achieve economies of scale, otherwise reduce costs, broaden their portfolio, increase their market presence, explore new product lines, or increase synergy.
The following is a list of additional reasons for acquisitions:
1. To enter a foreign market
If a company seeks to extend its operations to a foreign nation, acquiring an existing company in that country might be the most effective method of market entry. The acquired company would already have a workforce that speaks the language and is familiar with local supply chains, as well as a recognizable brand and other non-physical assets.
2. As a strategy for growth
A company may encounter certain physical or logistical limitations to its continued growth. In such situations, it can be more economically efficient to purchase another company than to than expand one’s own operations. If the company can find a flourishing business to purchase, it may instantly create a new revenue stream, and thus a new means for generating profits.
3. To reduce competition or avoid overcapacity
In scenarios where competition is excessive or physical capacity is underutilized, a company might undertake an acquisition to eliminate a competitor or to diminish surplus capacity.
4. To acquire new technology
Given that developing new technological capabilities in-house can require a very substantial investment of both time and financial resources, it may be more cost-effective to acquire another company that has already successfully developed the needed technology.
What is the Difference Between Acquisitions, Mergers, and Takeovers?
Acquisition: Voluntary sale leading to demise of the acquired company
In the case of voluntary acquisitions, the acquired company’s board of directors consents to the purchase. Such deals are commonly structured to be mutually advantageous to both parties.
The acquired company will typically assist the acquiring company by providing financial statements and other valuations relevant to the acquired company’s assets and liabilities.
Merger: Voluntary sale leading to the demise of both the acquired and the acquiring companies and the creation of a third, new company
A merger is a sort of mutual acquisition between companies equal companies. Both parties must of course agree to the merger.
As result of a merger, both of the parties entering into the agreement cease to exist, and a brand-new, third entity comes into existence.
For a merger to be mutually desirable, both parties must be approximately equal. However, this rough equality can take a variety of forms, from size, scale of operations, and customer base to stock market valuation, income generated, profitability, etc.
In a merger, each company’s management will believe that the new consolidated entity will generate more value for its own stakeholders than the company is capable of doing by operating independently.
Takeover: Involuntary sale of the acquired company by the acquiring company
Hostile acquisitions, also known as “hostile takeovers,” happen when the acquired company’s management does not want the company to be acquired.
Since the acquired company does not want to be purchased, the managers of the acquiring company are obliged to aggressively pursue the takeover.
Typically, they will seek to buy the acquired company’s shares in any way they can, until they have achieved a controlling interest, whereupon they can force the purchase by outvoting the original company’s members of the board of directors.
Assessing Potential Acquisition Targets
A number of factors must be taken into account when one company is considering acquiring another company, including assessing an appropriate price for the target company, its debt burden, and any litigation it may be subject to.