Personal Finance Beginner

What is an acquisition?

acquisitions

Key Takeaways

  • An acquisition, in business terms, is when a company gains control over another company by buying all or a major part of its shares.
  • Acquisitions are mostly amenable, while takeovers could be hostile. If two companies merge to become a new third entity, a merger is said to have taken place.
  • Due diligence, valuations, and negotiations are often part of a successful acquisition effort.

Facebook (now Meta) is one of the biggest tech companies in the world today. But how did it get there? Strategic and timely acquisitions are a big part of the company’s growth story. Meta’s most famous acquisitions, of course, are Instagram and WhatsApp.

But how do acquisitions work? And how are they different from mergers and takeovers? Find all the answers right here.

What is an acquisition?

An acquisition is when a company buys all or a major part of another company’s shares to gain control over it. When over 50% equity is acquired, the company that acquired it gets to call the shots without needing the consent of other shareholders.

Acquisitions are an important part of the business world. They are sometimes meant to help the acquirer reap the benefits of a bigger or well-established infrastructure. Other times, the aim is to dissolve the target company entirely. The outcome depends on the strategy and goals of the acquiring company.

While acquisitions are very common among small and mid-sized companies, they don’t make the headlines as often as the larger ones do.

But why do acquisitions take place? Companies choose to acquire other entities for multiple reasons. They could, for example, be related to their choice to expand their operations to foreign markets or unexplored sectors. An acquisition could also be a growth move. It may even be meant to reset a poorly performing company as building a new one from scratch may be way tougher.

Acquisitions vs. Mergers vs. Takeovers

These three terms tend to be used interchangeably, but in fact, imply very different outcomes. Differentiating between them will give us that extra bit of clarity on the topic of acquisitions.

The difference between mergers and acquisitions

Mergers happen when two companies mutually decide to combine, forming a third, completely new entity. The new entity gets to assume a new name, and the ownership and management comprise people from both former companies. The decision to merge is always mutual. It usually involves both parties seeking to maximize their benefits, even if it means diluting their influence individually.

Acquisitions, on the other hand, do not necessarily result in the creation of a new entity. They are, however, also collaboratively and amiably executed.

The difference between takeovers and acquisitions

Acquisitions and takeovers are largely the same, except for one big difference. With an acquisition, the assumption is that the maneuver was made with the consent of the acquired company. However, a takeover means that the acquired company had shown some resistance to being acquired.

To sum it up, acquisitions are, in most cases, friendly, while takeovers aren’t. The firms are equal in acquisitions. Not so with takeovers.

How acquisitions work

The process of acquiring a company is not as easy as it may seem. It involves several teams of lawyers, tax advisors, executives, and other professionals on both sides of the transaction. And the process could take months or even years.

Here’s a quick summary of every step involved, arranged chronologically.

Step 1: Due diligence

Acquisitions usually begin with a letter of intent, from the acquiring company to the target company. This letter is usually not binding, but it serves as a signal for due diligence to begin. If everything checks out, lawyers draft an acquisition agreement to send to shareholders.

Step 2: Valuation

Acquiring a company, in most contexts, means buying a company. The price is not fixed. It varies depending on the choice of business metrics. Some businesses offer multiples of the target company’s earnings or use EBITDA (short for “Earnings before interest, taxes, depreciation, and amortization”) to determine profitability.

Step 3: Negotiation

Dealmakers and negotiators from both companies, represented by the Chief Financial Officer (CFO), sit together to iron out the details. The parties may choose to employ consulting firms or investment banks to help them through this stage.

Step 4: Financing

Acquiring companies may choose to finance the transaction either by borrowing cash from private equity firms, investment banks, or other financial institutions. Once the purchase is made, the deal is officially concluded.

Step 5: Integration

The acquired company starts adapting to the culture and responsibilities of the bigger company and may begin restructuring its work as required.

Types of acquisitions

There are several different ways in which one company can acquire rights over another.

  1. Asset purchases involve a company acquiring the assets of another company after shareholder approval. These assets could range from intellectual property to office equipment.
  2. Management acquisitions take place when management executive/s from one company acquires a controlling interest in another company.
  3. Carve-outs are when companies acquire some portion of another company’s infrastructure or assets. That is, a portion carved out from another company. Such acquisitions help companies get higher revenue or profitability. Buying up a company’s manufacturing division without its distribution facilities, for instance, could constitute a carve-out.
  4. Tender offer acquisitions take place when a company wishes to buy up outstanding shares of a target company at a special price instead of going by the market value. These offers are sent directly to the shareholders of the company rather than its executives. They’re more attractive to the buyer because, usually, investors offer a higher price per share to incentivize holders to sell.

Pros and cons of acquisitions

Acquisitions take place for a variety of reasons. In case you are wondering what they are, this section should help.

Advantages of acquisitions

There are some obvious advantages of acquisitions. They help with the following.

  • Enabling entry: Entering new businesses can become less daunting with some sensible acquisitions. Acquiring a company with an established infrastructure, brand recognition, and customer base helps outside companies enter high-barrier markets.
  • Growing market share: With acquisitions, companies can grow their market share in multiple sectors exponentially.
  • Gaining resources: The acquirer can instantaneously gain new competencies and resources. Without the acquisition, it might otherwise take years to develop them natively.
  • Easy out: Acquisitions are also great news for small businesses that don’t have enough capital. Sustaining long-term growth is a challenge for such companies. So, with acquisitions, instead of selling equity, investors can afford to cash out and move on.

Disadvantages of acquisitions

Most things come with their share of challenges, and acquisitions are no different. Here are some of the disadvantages that come with many mergers.

  • Potential culture clashes: With an acquisition, a culture clash might be imminent. It might take some time for both the parent and target company to adapt to each other.
  • Duplication: Sometimes acquisitions can mean there being duplicate departments or executives. Thus they could lead to redundancy in the workforce. Layoffs and salary cuts could ensue in such cases.
  • Additional stakeholders may be needed: Other stakeholders involved, like suppliers, might not be able to cope with increased demand for resources or services after an acquisition. This may mean that the stakeholder list may need to be revisited or enlarged.

FAQs

What is a acquisition in business?

An acquisition in business involves one company purchasing another company’s shares or assets to gain control. It’s a strategic transaction that can enhance profitability and synergies between the firms.

What do you mean by acquisitions?

Acquisitions in business involve one company purchasing another’s shares or assets to gain control, aiming for synergy and increased profitability. It’s a strategic transaction to expand and strengthen the acquiring company.

What is acquisition and example?

An acquisition is when one company purchases another’s shares or assets to gain control. For example, Amazon acquired Whole Foods Market, expanding its retail presence and product offerings.

What is acquisition process?

The acquisition process involves steps like strategy development, target identification, due diligence, negotiation, and finalization. It’s a series of actions to buy or merge with another company, expanding business.

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