What is an acquisition?
An acquisition is where one company takes over another company it is targeting. This can be achieved through a cash deal, or through buying at least 50% of the target company’s stock.
Investors generally describe these transactions in different ways, depending on the circumstances. If a target company’s board of directors approve of an acquisition attempt and are cooperative, this is labelled as an “acquisition.” This escalates to a “hostile takeover” when the target company is opposed to such a transaction – leaving the bigger firm with no choice but to buy increasingly large chunks of shares until they have a controlling interest.
Acquisitions are not to be confused with mergers. This is where two companies join together to form a new, single company, meaning they no longer exist in their own right.
Why do acquisitions take place?
By and large, acquisitions occur to help businesses accelerate their growth. A firm with a solid reputation in the US may decide to acquire a similar company in Europe or Asia, enabling them to expand internationally and instantly have access to a customer base, staff and equipment.
In other circumstances, the acquiring company may be trying to address its own weaknesses. It could be running into logistical difficulties or lack the technology it needs to stay relevant. Instead of throwing money at these problems, it can sometimes be easier to acquire another business that will help address some of the issues – by offering extra capacity or sharing its technology. Reducing the number of competitors in the marketplace is another advantage.
What are the downsides?
When a company is absorbed through an acquisition, it can be a massive learning curve for all involved. The two organizations might have different cultures and ways of working, and morale among employees can take a hit. Acquisitions can also mean that there is an unnecessary level of duplication – two accounting teams, two HR teams and two marketing teams – when only one department is needed. This inevitably leads to reorganization and efficiencies, triggering job losses and demotions.
Ultimately, it is crucial for an acquiring firm to perform due diligence before completing a deal-making sure the target company is an ideal fit, checking its financials are in order, and there aren’t any skeletons in the closet (such as lawsuits or substantial levels of debt) that could make an acquisition more hassle than it’s worth.