Acquisition

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.

• 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.

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 buyout, 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 subsidiary of a larger company, such an opportunity posed a vast landscape of growth opportunities.

Under the brand name and guidance of the parent company, most subsidiaries flourish enormously, reaching new heights. Moreover, it allows original investors like venture capital and angel investors 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.

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

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 debts (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.

Merger 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 takeover 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, conglomerate or congeneric.

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 line 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 shareholders. It also lowers the competition level for the acquirer.

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 expenses 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.

This article has been a guide to what is the Acquisition of a company and its meaning. Here we discuss how Acquisition works along with its advantages, disadvantages. You can learn more about financing from the following articles –

• Types of Acquisition
• Company Acquisitions Examples
• Mergers vs. Acquisitions
• Types of Mergers and Acquisitions