Understanding Acquisition

An acquisition is when one company purchases most or all of another company’s shares to gain control of that company. Purchasing more than 50% of a target firm’s stock and other assets allows the acquirer to make decisions about the newly acquired assets without the approval of the company’s other shareholders. Acquisitions, which are very common in business, may occur with the target company’s approval, or in spite of its disapproval. With approval, there is often a no-shop clause during the process.

We mostly hear about acquisitions of large well-known companies because these huge and significant deals tend to dominate the news. In reality, mergers and acquisitions (M&A) occur more regularly between small- to medium-size firms than between large companies. An acquisition is a business combination that occurs when one company buys most or all of another company’s shares. If a firm buys more than 50per cent of a target company’s shares, it effectively gains control of that company.

An acquisition is often friendly, while a takeover can be hostile; a merger creates a brand new entity from two separate companies. Acquisitions are often carried out with the help of an investment bank, as they are complex arrangements with legal and tax ramifications. Acquisitions are closely related to mergers and takeovers.

Companies acquire other companies for various reasons. They may seek economies of scale, diversification, greater market share, increased synergy, cost reductions, or new niche offerings. Other reasons for acquisitions include those listed below.

If a company wants to expand its operations to another country, buying an existing company in that country could be the easiest way to enter a foreign market. The purchased business will already have its own personnel, a brand name, and other intangible assets, which could help to ensure that the acquiring company will start off in a new market with a solid base.

Perhaps a company met with physical or logistical constraints or depleted its resources. If a company is encumbered in this way, then it’s often sounder to acquire another firm than to expand its own. Such a company might look for promising young companies to acquire and incorporate into its revenue stream as a new way to profit.

If there is too much competition or supply, companies may look to acquisitions to reduce excess capacity, eliminate the competition, and focus on the most productive providers.

Sometimes it can be more cost-efficient for a company to purchase another company that already has implemented a new technology successfully than to spend the time and money to develop the new technology itself. Officers of companies have a fiduciary duty to perform thorough due diligence of target companies before making any acquisition.

In general, “acquisition” describes a primarily amicable transaction, where both firms cooperate; “takeover” suggests that the target company resists or strongly opposes the purchase; the term “merger” is used when the purchasing and target companies mutually combine to form a completely new entity.

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