Acquisition

What Is an Acquisition?

An acquisition occurs when one business purchases another company’s shares or assets to gain control over it. By acquiring over 50% of the shares, the buying company becomes the majority shareholder, giving it the power to make decisions regarding the company’s operations. In many cases, acquisitions are amicable, where both companies agree to the terms. However, there are also hostile takeovers, where the target company resists the acquisition.

Acquisitions are a crucial part of corporate strategy, allowing businesses to grow quickly, enter new markets, or reduce competition.

Reasons Companies Pursue Acquisitions

Companies pursue acquisitions for various reasons, and these motives often determine the acquisition strategy they will follow. Some of the most common reasons include:

1. Market Expansion: Acquiring an existing company in a new market provides a head start. The target company already has an established customer base, local market knowledge, and resources. For example, a company looking to expand globally may acquire a local business in the target country to ease its entry into the market.
2. Gaining Competitive Advantage: Sometimes, companies buy their competitors to reduce competition in the market. The acquiring company eliminates rivals, allowing it to boost its market share and pricing power. It is often the case in industries with few dominant players.
3. Growth Strategy: Acquisitions can be a fast way for a company to grow. Instead of building new operations from scratch, it can purchase an established business with existing infrastructure, personnel, and customer base.
4. Gaining New Technology or Expertise: ACompanies sometimes acquire new technologies or expertise through acquisitions. For example, a tech company might purchase a startup to access cutting-edge technology, or a pharmaceutical company may acquire another to gain new drug patents.
5. Cost Reduction and Efficiency: Acquiring a company that is part of the same supply chain can help a company reduce costs. For example, a manufacturer may acquire a supplier to gain better control over production costs and ensure consistent supply.

The Acquisition Process

The acquisition process can be complex and often involves several steps, particularly when large companies are involved. Here’s a general outline of the typical acquisition process:

1. Identifying a Target: The acquiring company identifies a target business that meets its strategic goals, whether for market expansion, technology acquisition, or gaining competitive advantages.
2. Valuation: The buying company evaluates the target company to determine its value before acquiring. It may involve examining financial statements, assets, liabilities, and other factors to establish a fair price.
3. Negotiation: After valuation, the two companies negotiate the terms of the acquisition. These negotiations include the price, payment method (cash or stock), and how the transition of control will occur.
4. Due Diligence: Before finalizing the acquisition, the buying company performs due diligence to examine the target company’s legal, financial, and operational details. It ensures there are no hidden liabilities or risks.
5. Regulatory Approval: Large acquisitions often require approval from regulatory bodies. For example, antitrust regulators may need to review the deal to ensure it doesn’t harm competition.
6. Finalization: The company finalizes the acquisition after completing all the necessary checks. The acquiring company takes control of the target company’s operations, assets, and liabilities.

Types of Acquisitions

There are several types of acquisitions, each defined by the relationship between the acquiring company and the target:

1. Horizontal acquisition: happens when a company buys a competitor operating in the same industry and at the same stage of the supply chain. For example, one car manufacturer buying another car manufacturer is a horizontal acquisition. The goal is often to gain more market share or reduce competition.
2. Vertical Acquisition: In a vertical acquisition, a company acquires another company that operates at a different point in the same supply chain. For example, a clothing retailer might acquire a fabric manufacturer. It allows the acquiring company to control more of its production process and reduce costs.
3.  Conglomerate Acquisition: This type occurs when a company acquires a business in a completely unrelated industry. For example, a tech company might acquire a food processing company. Conglomerate acquisitions help businesses diversify their operations and reduce the risks that come from relying on a single industry.
4.  Congeneric acquisition: the acquiring company buys a target company in a related industry, but they don’t directly compete with each other. For example, a company manufacturing computer hardware might acquire a software company.

Acquisition vs. Merger

Although people often group acquisitions and mergers together, they differ slightly. In an acquisition, one company buys another and takes over its operations. The acquired company may continue to operate under its name or as a subsidiary.

In a merger, two companies of about the same size join forces to create a new entity. Both companies cease to exist independently, and a new company is created, often with a new name and structure. In most mergers, both companies agree that the combination will benefit them mutually.

Real-World Example of an Acquisition

One of the most famous acquisitions in recent years is Facebook’s 2012 acquisition of Instagram for approximately $1 billion. At the time, Instagram was a relatively small photo-sharing app with around 30 million users. Facebook saw Instagram as a rising competitor and a valuable addition to expand and strengthen its social media platform. By acquiring Instagram, Facebook eliminated a competitor and gained a popular platform that continues to generate substantial revenue.

Conclusion

Acquisitions play an important role in shaping the business landscape. They offer companies opportunities for expansion, entering new markets, and increasing efficiency by merging resources or eliminating competition. While they can provide significant advantages like growth and diversification, acquisitions also come with financial risks, integration difficulties, and regulatory hurdles. For small and large companies, understanding the dynamics of acquisitions is essential to making informed decisions that align with long-term strategic goals. Whether viewed as a pathway to innovation or a method of securing market dominance, acquisitions remain a key driver of business evolution.