What is acquisition?

In this article, we will learn about the concept of acquisition, how it works, its types, and the differences between it and merger, as well as the advantages and disadvantages of acquisition.

Definition and Examples of Acquisition

An acquisition occurs when one company takes control of another existing company. The acquisition can be agreed upon between the two companies or conducted through a hostile takeover. There are many similarities between acquisition and merger, and they are often considered synonymous, but they are different. An acquisition can be financed through cash, securities offers, or a leveraged buyout.

How Acquisition Works

An acquisition can result from friendly discussions between two companies, where the target company welcomes the acquisition. In this case, the two companies negotiate the terms of the acquisition and ultimately reach an agreement.

However, an acquisition can also occur against the will of the management of the acquired company in what is known as a “hostile takeover.” In the case of a hostile takeover, an external company acquires a controlling stake in the target company by purchasing more than 50% of the target company’s shares. This is done by offering a higher price for the shares of current shareholders than what they could currently receive in the open market, motivating them to sell.

Regardless of whether the acquisition is friendly or hostile, the shares of the acquired company are usually purchased at a price higher than their current market value. The difference between the current market price of a share and the price offered in the acquisition process is called a “premium.” When Amazon acquired Whole Foods in 2017, it offered $42 per share, which was a 27% premium over the current share price.

Types of Acquisition

The price of the acquisition can be paid in cash, by paying money to current shareholders of the target company for their shares. This is the simplest method of payment.

In the case of payment through securities, the acquiring company will offer new securities in exchange for the securities and assets of the target company.

In the case of a leveraged buyout, the acquiring company borrows a significant amount of money to complete the deal, and often some of the purchased assets are sold to pay off the debt once the deal is completed.

Acquisition vs. Merger

The terms “acquisition” and “merger” are often used interchangeably in practice, but they are technically different. In an acquisition, the target company is absorbed into the acquiring company and ceases to exist. In a merger, two companies combine to form a new company.

Merger: Two companies are merged to create a larger company.

Acquisition: One company takes over another company.

Advantages and Disadvantages of Acquisition

Acquisition is driven by the acquiring company’s desire to improve financial performance. However, like any business activity, acquisition is not without risks. There is no guarantee that an acquisition or merger will improve the company’s profits.

Advantages:

• Greater economies of scale may be achieved due to the larger size.
• Market share increases if a competitor is acquired.
• Potential for vertical integration.
• Cost reductions through synergies.

Disadvantages:

• Large changes may create integration issues.
• The ability to reduce costs through synergies may be overestimated.
• The acquiring company may pay more than necessary.

In summary, acquisition can be an effective means of achieving growth and improving the financial performance of the acquiring company, but it also carries potential risks.

Source: https://www.thebalancemoney.com/what-is-an-acquisition-5187224