Meaning of Acquisition
Acquisition is merely an act of taking over or gaining the entire or most of the control over another entity’s shares by purchasing at least fifty percent of the targeted company’s stock and such other corporate assets and it gives the acquirer the right and liberty to take decisions of the assets that are newly acquired without the approval being taken from the entity’s shareholders.
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Types
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#1 – Stock Purchase
The buyer purchases all or a substantial portion of the target Company’s shares. The buyer gets the ownership of the Company while the target Company continues to exist. The purchaser now has the majority of the seller’s voting rights. Stock purchases are typically beneficial to the sellers as the long-term capital gains on the sale of stocks is taxed at a lower rate. The buyer of the Company now owns both the assets and liabilities of the target company. Thus, the buyer will inherit the legal and financial difficulties if any of the Company.
#2 – Asset Purchase
In an asset purchase method, the buyer can select the assets it would like to buy and leave the liabilities. This method is usually used while buying a particular asset, like a single unit or a division of the Company. The buyer can buy the assets using cash or by giving its own shares. The method is usually preferred by the buyers as they get to select the type of assets they want to buy and ignore the liabilities.
Also, have a look at the differences between the Stock Purchase and Asset Purchase here.
Examples
- In 2017 Amazon bought Whole Foods, which is a high-end organic grocery chain, for $ 13.7 Billion. The Acquisition provided Amazon with hundreds of physical stores and strong entry into the grocery business.
- In 2017 itself, Disney announced a deal to buy major assets of Century Fox assets in a historic $ 52.4 billion deal, which includes the Century’s movie streaming all Hulu.
- Apple acquired Shazam music, TV shows, and songs app for $ 400 Mn. The Company plans to integrate the app into Apple’s iOS and utilize its technology.
Advantages
- The Acquisition is a time-efficient growth strategy that helps the business to acquire the core competencies and resources which are not currently available. The Company can instantaneously enter into a new market, product and overcome the barriers of entry. Further, it will not have to invest much time and effort in product development.
- It provides market synergy by quickly building the market presence of the Company. The Company can increase its market share and reduce competition. It can further build on its brand.
- It can improve financials and give short term gains when an organization with a low share price are acquired. Synergies can improve cost cuttings as well as provide efficient use of resources.
- Acquiring other businesses and entities reduces barriers to entry. The Company can overcome the market entry barrier in no time and hence reduce the market research, product development costs.
- They provide confidence in the Company and can boost shareholders’ morale and confidence in their Company. Shareholders may expect the Company to buy or acquire other companies, which may increase the share price and yield higher returns for them.
Disadvantages and Limitations
- Every Acquisition comes with a cost; at times, the cost can be higher than anticipated. In such a case acquiring Company can take higher debt and increase its debt to equity ratioDebt To Equity RatioThe debt to equity ratio is a representation of the company's capital structure that determines the proportion of external liabilities to the shareholders' equity. It helps the investors determine the organization's leverage position and risk level. read more. Also, if the expected synergies are not met, the Company can lose out.
- Returns to the shareholders may not be as expected. Acquisition, in general, takes time, and it may take more time to integrate the two companies. Thus, shareholders may not get the expected returnsExpected ReturnsThe Expected Return formula is determined by applying all the Investments portfolio weights with their respective returns and doing the total of results. Expected return = (p1 * r1) + (p2 * r2) + ………… + (pn * rn), where, pi = Probability of each return and ri = Rate of return with probability. read more on their investment from the Acquisition.
- The integration of the two companies has their challenges, especially managing the employees’ expectations. Cultural issues arise when employees of the two Companies meet. The new methods and activities may take time to settle with the old employees of the Company, which may raise anxiety and integration challenges.
- If the integration is of unrelated products and services, the employees will have further challenges to understand the work, market, and competencies.
- If the management is not done properly, this may lead to disruption of business and failure of the motive for which the Acquisition was made in the first place. The Company should have enough managerial resources who have first-hand experience in acquisitions. Thus they should be able to manage the employees, work, operations and successfully integrate the two businesses.
Conclusion
The Acquisition is a take over of the majority of shares or major assets of another Company or the Target Company. A larger Company generally buys out smaller Companies for many reasons like to gain more market share, to reduce competition, to increase revenue, to bring synergy in the business. At the same time, acquisitions are good to set the Company at a growth path. Still, if not handled properly and not integrated within the proposed and planned timeline, it disrupts the business and can lead to failure.
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