What is acquisition?

Definition and Examples of Acquisition

An acquisition is a process in which one company takes ownership and control of another company.

An acquisition, also known as a takeover, occurs when one company successfully buys another company. A friendly acquisition happens when the leaders of the target company agree to sell, and the two companies negotiate to settle on a sale price. An aggressive acquisition occurs when the leaders of the company do not agree to sell, so the prospective buyer makes their offer directly to the shareholders. Acquisitions can be positive or negative for investors, but the long-term impact cannot be predicted in advance.

How Does an Acquisition Work?

An acquisition is a process that involves one company successfully acquiring another company. But there are more details involved in the acquisition process.

In most cases, the acquisition process begins with negotiations between the two companies. The acquiring company expresses its desire to acquire the other company. The two parties then conduct business evaluations and due diligence to determine the current value of the target company and what its value will be after the companies merge.

With that information, the two companies can agree on a sale price and draft an acquisition agreement. Shareholders may need to vote on the matter. If a majority of shareholders agree to the acquisition, ownership of the business is transferred to the acquiring company, and the target company ceases to exist.

After the acquisition, shareholders of the target company will receive either shares in the acquiring company or cash at the fair market value of their shares.

Types of Acquisitions

Acquisitions can take different forms. The most common types are friendly acquisitions and aggressive acquisitions.

Friendly Acquisition: A friendly acquisition, also known as a takeover, involves cooperation between the management and board of directors of the target company. This type of acquisition involves a collaborative process between the two companies to agree on a fair sale price and become one company.

Aggressive Acquisition: Aggressive acquisitions are less common and occur when an acquiring company takes control of the target company without the approval of the target company’s leaders.

Aggressive acquisitions can occur in key ways:

• Tender Offer: Aggressive acquisitions are commonly achieved through a tender offer. This occurs when the acquiring company makes an offer to buy shares of the other company in hopes of gaining a controlling interest. It falls to the shareholders to ensure that the acquisition is successful.
• Proxy Fight: Through a proxy fight, the prospective buyer seeks to elect board members who will support the sale, ultimately aiming to gain sufficient support for a traditional acquisition.

What Does This Mean for Individual Investors?

As an investor, you may or may not notice the effects of an acquisition. As a shareholder in the acquiring company, little is likely to change for you. In some cases, a successful acquisition can yield positive results for the company and, thus, for shareholders. However, there are also examples of acquisitions that have led to problems and damages for shareholders in the long run.

For shareholders in the target company, the effects will be more apparent. In many cases, your shares in the target company will be exchanged for shares in the acquiring company. But in some cases, you may simply receive cash at the fair market value of your shares.

Regardless of which side you are on in the acquisition process—whether as a shareholder in the acquiring company or the target company—you may experience some effects in your investment portfolio.

Unfortunately, it’s not possible to know in advance whether the impact will be positive or negative, as it depends on the companies involved. If the company you are investing in is going through a significant process like an acquisition, do the necessary research to make the optimal decision regarding your investment.

Sources:

The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we fact-check and maintain the accuracy, reliability, and quality of our content.

Google.

“Google Completes Fitbit Acquisition.”

Fitbit. “Fitbit To Be Acquired by Google.”

U.S. Securities and Exchange Commission. “Sanofi-Aventis Commences Tender Offer To Acquire All Outstanding Shares of Genzyme for $69 Per Share in Cash.”

Source: https://www.thebalancemoney.com/what-is-a-takeover-5212048