Written by True Tamplin, BSc, CEPF®
Updated on July 10, 2021
A business acquisition is when a company purchases all or most of another company’s shares.
This is a very common business practice, and typically occurs with approval from the target company, but can occur without approval.
When the acquisition is approved, the acquiring firm creates a no-shop clause to ensure the seller does not solicit purchase from other companies.
News networks tend to focus on the acquisitions of large or well known companies, as these deals are very significant.
However, mergers and acquisitions most often occur between small or medium sized companies.
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Companies make acquisitions for a variety of reasons.
It is usually done to benefit the company in some way, such as diversifying the company, increasing the company market, reducing product cost, or by offering a new product.
This happens often when companies want to break into a foreign market.
It is easier to buy an existing company that already operates in that market rather than to start new operations in a foreign market.
The purchased business has personnel, brand name recognition, and other assets that ensure a successful start in a new market.
Acquisition as a Growth Strategy
A business acquisition is also a growth strategy for business met with physical or logistical challenges or depleted resources.
In this case, it is safer to acquire a new firm than expand its own.
In this case, companies look for promising new companies to incorporate into their revenue stream to make new profits.
Acquisition is also a growth strategy for market share.
If there is an excess capacity in a certain market, acquiring your competitor can decrease competition.
This balances excessive supply of a product, and helps companies focus on the most productive providers.
Acquiring a new company can also lead to technological gains, especially if the acquired company has successfully implemented new technology.
It is more cost effective for a company to acquire another company that has already mastered this implementation, rather than to use time and money to implement new technology independently.
Acquisition vs Merger vs Takeover
When discussing acquisition, it is important to examine mergers and takeovers as well, since they are similar concepts.
However, they have different meanings in business settings.
Acquisitions are usually amicable.
They occur when the target firm agrees to be acquired by the purchasing firm, and continued action is approved by the directors.
Companies will move forward when legal stipulations are met.
Takeovers tend to be less amicable, sometimes hostile.
Hostile acquisitions do not have the agreement of the target firm, so the acquiring firm purchases large stakes of the target company.
This happened when Kraft Foods INC took over Cadbury PLC in March 2010. Kraft purchased Cadbury for $19.6 billion, and acquired the company by purchasing extensive parts of their shares.
Mergers are a little different, as they lead to the formation of new companies.
The purchasing entity and the target entity mutually come together to form a new entity.
Things to Evaluate before an Acquisition
1. Price: There are metrics used to value acquisition candidates, which vary by industry.
Acquisitions often fail because the asking price for the target company exceeded the metrics.
2. Debt Load: Target companies with high levels of liability are often warnings of potential problems.
3. Undue Litigation: Though lawsuits are common in business, acquisition candidates should not have litigation that exceeds the measure of reasonableness for the industry.
4. Financials: The more clear and well-organized the financial statements, the better the acquisition target.
The acquirer can exercise due diligence smoothly.
Transparent and complete financials help the process go smoothly, and ensures there are no unwanted surprises after a complete acquisition.