What Is an Acquisition?

What Is an Acquisition?

Let me tell you directly: an acquisition happens when one company buys most or all of another company's shares to take control. These deals are standard in business and can happen with or without the target company's okay. You'll often see a no-shop clause in place during the approval process.

You probably hear about big-name company acquisitions in the news, but mergers and acquisitions (M&A) actually happen more often between small to medium-sized firms than the giants.

Key Takeaways

Here's what you need to grasp: an acquisition is when one company buys most or all shares of another to combine businesses. If you buy more than 50% of the shares, you effectively control the target company. Acquisitions can be friendly, but takeovers might be hostile, and mergers create a whole new entity from two separate ones.

These deals often involve investment banks due to their complexity, including legal and tax issues. Acquisitions tie closely to mergers and takeovers.

Understanding Acquisitions

An acquisition is a straightforward financial move where one business grabs the majority or all shares of a target to control its operations—think assets, facilities, resources, market share, customers, and more.

Companies do this for reasons like economies of scale, diversification, bigger market share, synergy, lower costs, or new offerings. Sometimes, it's just to eliminate competition.

Most acquisitions are friendly: the target agrees, the board approves, and it benefits both sides. Both parties strategize to ensure the right assets are bought, review financials for obligations, and proceed once terms are set and legal requirements met.

Fast Fact

Remember this: buying over 50% of a target's stock and assets lets you decide on those assets without needing other shareholders' approval.

Factors to Consider Before an Acquisition

You have to evaluate if the target is a solid candidate. Ask yourself: is the price right? Metrics for valuing candidates differ by industry, and deals fail if the price exceeds them.

Check the debt load—an unusually high level signals problems. The target might need a whitewash resolution from your directors confirming solvency.

Look at litigation: lawsuits are normal, but excessive ones beyond what's reasonable for the company's size and industry are a red flag.

Scrutinize the financials: good targets have clear, organized statements for easy due diligence, preventing surprises after the deal closes.

Reasons for Acquisitions

Entering a new or foreign market? Buying an existing company there might be the easiest way. It comes with personnel, brand, and assets, giving you a strong start.

For growth strategy, if you're constrained physically or by resources, acquiring another firm makes more sense than expanding yourself. Look for promising companies to add to your revenue stream.

To reduce excess capacity and competition, acquisitions can eliminate rivals and focus on efficient providers. Watch out—federal regulators monitor deals that might raise prices or lower quality for consumers.

Gaining new technology? It's often cheaper to buy a company that's already implemented it successfully than to develop it in-house.

Important Note

Company officers have a fiduciary duty to do thorough due diligence on targets before any acquisition.

Acquisition vs. Takeover vs. Merger

Acquisition and takeover are similar but have Wall Street nuances. Acquisitions are usually amicable with cooperation; takeovers imply resistance from the target. Mergers happen when companies combine mutually to form a new entity.

In practice, these terms overlap since each deal is unique with its own reasons.

Takeover

Hostile takeovers are unfriendly acquisitions without the target's consent. The acquirer buys large stakes to gain control, forcing the deal. Even non-hostile takeovers suggest inequalities between firms.

Merger

A merger fuses two companies into one new entity—more than a friendly acquisition. It typically involves equals in size, customers, and operations, with the belief that the combined company is more valuable.

Example of Acquisitions

Take AOL, once hailed as bringing the internet to America. Founded in 1985, it became the largest U.S. internet provider by 2000. Time Warner was the old-media giant with publishing and TV.

In 2000, AOL bought Time Warner for $165 billion, the biggest merger ever, aiming to dominate news, music, entertainment, cable, and internet. But it failed; the dotcom bubble burst, and they split in 2009. Time Warner went independent until Verizon bought AOL in 2015 for $4.4 billion.

Then in 2016, AT&T announced buying Time Warner for $85.4 billion, completing it in 2018 after a court battle with the DOJ over competition concerns. The government lost, but AT&T later spun off the media assets.

What Are the Types of Acquisition?

Acquisitions fall into four categories. Vertical: acquiring along the supply chain, upstream or downstream. Horizontal: buying a competitor in the same sector and supply chain point. Conglomerate: acquiring in a different industry. Congeneric: buying in a related industry but with different products for market expansion.

What Is the Purpose of an Acquisition?

Acquisitions expand product lines, cut costs via supply chain integration, maintain market share, or reduce competition.

What Is the Difference Between a Merger and an Acquisition?

In an acquisition, the parent fully integrates the target. In a merger, they combine to create a new entity with a new name and identity.

What Was the 1990s Acquisitions Frenzy?

The 1990s saw the internet bubble and megadeals, with multibillion buys like Yahoo's $5.7 billion for Broadcast.com or AtHome's $7.5 billion for Excite. It peaked in early 2000 with the 'growth now, profitability later' mindset.

The Bottom Line

Acquisitions are financial deals where one company buys shares to control another's operations. Reasons include new markets, market share, or eliminating competition. Big ones make headlines, but they're common in small to mid-sized businesses too.