Acquisition

Acquisition Meaning

Acquisition refers to the strategic move of one company buying another company by acquiring major stakes of the firm. Usually, companies acquire an existing business to share its customer base, operations and market presence. It is one of the popular ways of business expansion.

However, such a purchase may be proceeded with or without the approval of the target company, which is the firm that is acquired.

Key Takeaways
  • Acquisition refers to the procurement of one company by another through the purchase of significant or all the assets of the target company.
  • Though it is a company’s venture strategy, it is different from mergers, which integrates two or more firms.
  • It is adopted as a strategy to acquire a company for rapid expansion and development. However, many studies suggest that 70-90% of such ventures fail. One the other hand, the target company gains exposure to the expertise of the parent firm helping it reach new heights.

Acquisition Explained

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An acquisition is a business strategy that involves the procurement of one business entity by another. It can be done by either purchasing a significant portion of the target company’s stocks or buying off its assets. Acquisition as a term has many synonyms such as buyoutBuyoutA buyout is a process of acquiring a controlling interest in a company, either via out-and-out purchase or through the purchase of controlling equity interest. The underlying principle is that the acquirer believes that the target company’s assets are undervalued.read more, procurement, purchase and possession, which are often used interchangeably.

A company purchases an existing business firm to expand its empire. It helps enter into a new market/industry, utilize the acquired firm’s operational capabilities and tap into its resources. As such, it was deemed a favourite diversification measure of the conglomerates in the 1960s.

For example, Berkshire Hathaway, which is America’s one of the oldest conglomerates, today owns over 60 companies. Most of these firms were acquired through acquisition, making Berkshire Hathaway a $632 billion company today. As for the one which became a subsidiarySubsidiaryA subsidiary company is controlled by another company, better known as a parent or holding company. The control is exerted through ownership of more than 50% of the voting stock of the subsidiary. Subsidiaries are either set up or acquired by the controlling company.read more of a larger company, such an opportunity posed a vast landscape of growth opportunities.

Under the brand name and guidance of the parent companyParent CompanyA holding company is a company that owns the majority voting shares of another company (subsidiary company). This company also generally controls the management of that company, as well as directs the subsidiary's directions and policies.read more, most subsidiaries flourish enormously, reaching new heights. Moreover, it allows original investors like venture capitalVenture CapitalVenture capital (VC) is long-term finance extended to startups with high-growth potential to help them succeed exponentially. The investors are venture capitalists who bear the excessive financial risk and provide guidance to startups to attain their objectives.read more and angel investorsAngel InvestorsIndividuals who invest in new firms and start-ups are known as angel investors. In exchange, they demand equity or debt. It's more of an informal investing approach in which the company doesn't have to go through a lot of compliances.read more to take a big slice of profit once the deal materializes. When successful, target firms witness a voluminous rise in their share price with increased consumer demands.

Step-by-Step Process

The steps taken by the acquirer in the process of acquisition are as follows:

  • framing the strategy
  • determining the selection criteria of the target business
  • identifying potential targets
  • planning for acquisition
  • valuation of the target company
  • negotiating on price and terms
  • conducting due diligence (complete evaluation and fact-checking)
  • getting into a purchase and sale contract
  • financing the deal
  • closing the deal
  • acquisition accounting whereby the procurer acertains how to consolidate target company’s balance sheet into its own

Examples of Acquisition

For several years since the 1950s, the US experienced a booming trend in business buyouts, which was more strategical and rational than all previous attempts. As per a Washington Post article, 1997 marked around $700 billion worth of mergers and acquisitions altogether. It was higher than deals worth $650 million of the previous year.

The US economy was going through the internet bubble; the Starwood Lodging cracked a massive deal by acquiring the ITT Corp at $13.3 billion. Even Home Shopping Network Inc. took hold of Universal Studios’ cable and TV operations at $4.1 billion.

Another renowned example is the US bakery chain Panera Bread Co.’s purchase by JAB Holdings (Krispy Kreme Doughnuts owner) in 2017. The deal had been accomplished by purchasing stocks, and it was a win-win for both the companies. JAB had proposed to buy Panera’s net debtsNet DebtsDebt minus cash and cash equivalents equals net debt, which is the amount of debt a company has in comparison to its liquid assets. It is a metric that is used to evaluate a firm's financial liquidity and aids in determining if the company can meet its obligations by comparing liquid assets to total debt.read more (approx. $340 million), which had valued the deal at $7.5 billion.

JAB offered Panera shareholders $315 for each share which amounted to a 20.3% premium compared to the March 31, 2017 stock price. After the announcement, the target company’s share shot up to record highs of $312.98, after the surfacing of buyout details bringing prosperity to Panera shareholders.

Difference Between Merger and Acquisition

MergerMergerA merger is a voluntary fusion of two existing entities equal in size, operations, and customers deciding to amalgamate to form a new entity, expand its reach into new territories, lower operational costs, increase revenues, and earn greater control over market share.read more refers to the process of two or more business entities joining forces to attain mutual goals. For instance, the 2007’s merger of Sirius Satellite Radio and XM Satellite Radio lead to the inception of the American broadcasting company Sirius XM.

In contrast, acquisition occurs when one company buys out more than the majority shares of another firm which becomes its subsidiary. For example, American drugmaker Pfizer was embroiled in a long takeoverTakeoverA takeover is a transaction where the bidder company acquires the target company with or without the management's mutual agreement. Typically, a larger company expresses an interest to acquire a smaller company. Takeovers are frequent events in the current competitive business world disguised as friendly mergers.read more battle of Warner-Lambert. It ended in 2000 with Pfizer’s decision to buy the company at over $90 billion.

While a merger is a friendly dealing, the latter can be an amicable buyout or a hostile takeover if the target company disapproves of such a venture. This is because the merger aims to the mutual growth of participating firms and reduce competition, while acquisition is primarily undertaken to bring in diversification. A company can undertake business procurement using any structure such as horizontal, vertical, conglomerateConglomerateA conglomerate is a company or corporation made up of different businesses that operate in various industries or sectors, often unrelated. It holds a stake in multiple smaller companies that choose to manage their business separately to avoid the risk of being in a single market, thus, taking advantage of diversification.read more or congeneric.

Advantages

An acquisition is a corporate strategy to gain access to new potential assets, resources, technology to attain fast business growth and expansion. It helps the firm diversify its business operations and product lineProduct LineProduct Line refers to the collection of related products that are marketed under a single brand, which may be the flagship brand for the concerned company. Typically, companies extend their product offerings by adding new variants to the existing products with the expectation that the existing consumers will buy products from the brands that they are already purchasing.read more by acquiring a company belonging to a different industry while diminishing the entry barriers of a new market.

Moreover, when a company purchases another business entity in the same industry, its market share increases, boosting confidence in consumers and shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares.read more. It also lowers the competition level for the acquirer.

When Acquisitions Go Wrong

First of all, as per an HRB report, 70-90% of acquisitions become unsuccessful. The primary reason for such failures is the acquirer missing out on keen due diligence. Also, the target company has a different vision and objectives, which often clashes with that of the acquiring firm.

Sometimes, the acquirer purchases a company overburdened with debts or has less growth potential. It may hinder the brand image of the acquiring company. For example, in 1994, Quaker Oats purchased Snapple for $1.7 billion (more than the latter’s worth).

While Quaker focused on marketing campaigns for Snapple to shelf the products in grocery stores and restaurants, it missed out on the fact drinks sell best in the convenience stores and gas stations. As a result, in 1996, Quaker had to sell off Snapple for $300 million (at a considerable loss).

The acquiring company gets a double staff for fulfilling the same responsibilities if the target company is from the same industry. It increases the personnel expensesExpensesAn expense is a cost incurred in completing any transaction by an organization, leading to either revenue generation creation of the asset, change in liability, or raising capital.read more or results in layoffs when human resource restructuring is done. When the managers and workers belonging to two different firms come together, they often have conflicting goals, cultures and mindsets, causing dissatisfaction and disputes.

FAQ

What is Acquisition, with example?

Acquisition refers to purchasing substantial shares of a company by another firm to gain ownership and control the former’s assets. For example, in 2017, the luxury retailer, Michael Kors Holdings Ltd., acquired the famous global luxury house, Jimmy Choo, for $1.2 billion.

How long does an acquisition take?

Usually, it takes 4 to 6 months for acquisition; however, this period varies as per the wish and urgency of the acquirer and the target company.

What makes an acquisition successful?

One of the key elements to a successful corporate buyout is paying keen attention to the due diligence and determining the fair worth of the target company’s assets.

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