Investment Banking Tutorials
- Mergers and Acquisitions
- What is Mergers and Acquisitions?
- Mergers vs Acquisitions
- Acquisitions Examples
- Horizontal Merger
- Vertical Merger
- Synergy in M&A
- Successful Mergers and Acquisitions
- Financing Acquisitions
- Acquisition Premium (Takeover)
- Statutory Merger
- Joint Venture
- Advantages of Joint Venture
- Types of Joint Venture
- White Knight
- Hostile Takeover
- Golden Parachute
- Poison Pills
- Killer Bees Defense Strategy
- Show Stopper in M&A
- What is Amalgamation?
- Spin off vs Split Off
- Forward Integration
- Backward Integration
- Horizontal vs Vertical Integration
- What is Divesting / Divestiture?
- Bootstrap Effect
- PAC MAN Defense
- Flip-In Poison Pill
- Flip-Over Poison Pill
- Scorched Earth Defense Policy
- Tender Offer
- Friendly Takeover
- Amalgamation vs Merger
- Lobster Trap Defense
- Asset Purchase vs Stock Purchase
- Joint Venture vs Strategic Alliance
- Greenshoe Option
- Dawn Raid Takeovers
- Crown Jewels Defense
- Best Mergers and Acquisitions Books
- What is Asset Restructuring?
- Investment Banking Basics (44+)
- Investment Banking Careers (25+)
- Investment Banking Firms (27+)
- Top Banks (42+)
- Cryptocurrency Basics (10+)
What is the Acquisition of a Company?
Acquisition refers to taking control of the target company by buying all (100% of shares) or a large portion (greater than 50% of shares). With this, the acquirer becomes the largest shareholder in the target company and can act swiftly with the decision-making process related to new products, asset acquisitions, product synergies, etc without taking any further approval from the board of the target company.
Types of Company Acquisition
#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 Stock Purchase and Asset Purchase here
Examples of Company Acquisition
- 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.
- The acquisition is time efficient growth strategy which helps the Company 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.
- The acquisition 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 through acquisitions.
- The acquisition can improve financials and give short term gains when an organization with 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.
- Acquisitions 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 ratio. Also, if the expected synergies are not met, the Company can lose out on the acquisition.
- 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 returns on their investment from the acquisition.
- Integration of two Companies has their own 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 acquisition management is not done properly this may lead to disruption of business and failure of the motive for which the acquisition was done in the first place. The Company should have enough managerial resources who have the first-hand experience in acquisitions and thus they should be able to manage the employees, work, operations and successfully integrate the two businesses.
The acquisition is a take over of 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. While acquisitions are good to set the Company at a growth path but if not handled properly and not integrated within the proposed and planned timeline the same acquisition can cause disruption in the business and can lead to failure.
This has been a guide to what is Acquisition of a company? Here we discuss types of Acquisition and its Examples along with advantages, disadvantages. You can learn more about financing from the following articles –