An acquisition is a significant business transaction where one company purchases most or all of another company’s shares to gain control. Commonly occurring between small to medium-sized companies, acquisitions can happen with or without the target company’s approval.
Key Takeaways
- An acquisition enables one firm to gain control by purchasing over 50% of another company’s shares.
- Acquisitions can be friendly, whereas takeovers can be hostile. A merger combines two companies into a new entity.
- Investment banks often facilitate acquisitions due to their complexity.
Understanding Acquisitions
In an acquisition, a company gains control by acquiring the majority or all of the shares of another company. This control can provide access to the target company’s assets, production facilities, resources, market share, and customer base. Companies pursue acquisitions for numerous reasons, such as economies of scale, diversification, and new market entry, among others.
Acquisitions are generally amicable, with both companies developing strategies to ensure mutually beneficial terms. Once legal stipulations are met, the purchase proceeds, allowing the acquiring company autonomy over the acquired firm’s assets.
Special Considerations
Companies should evaluate potential acquisition candidates carefully. Here are key steps to consider:
- Assess the Price: Ensure the asking price aligns with industry metrics to avoid overpaying.
- Analyze Debt Load: High liabilities can signal potential issues requiring a whitewash resolution.
- Review Litigation: Excessive legal issues can be a red flag.
- Examine Financials: Transparent and organized financial statements are crucial for smooth due diligence.
Reasons for Acquisitions
Entering a New or Foreign Market
Acquiring an existing company can simplify entering a new market by leveraging the target’s established assets and brand recognition.
Growth Strategy
When expansion options are limited, buying a promising company can enhance growth and profitability by adding new revenue streams.
Reducing Excess Capacity and Decreasing Competition
Acquisitions can eliminate competition and focus resources on the most productive providers, though regulators may scrutinize such deals to protect consumer interests.
Gaining New Technology
Rather than developing new technology, acquiring a company with already implemented tech can be cost-effective and expedient.
Acquisition vs. Takeover vs. Merger
Acquisition
Typically signifies cooperative transactions where both firms agree on the purchase.
Takeover
Often refers to hostile takeovers where the target firm resists the purchase.
Merger
Represents a mutually agreed union forming a completely new entity from two companies.
Example of Acquisitions
AOL Buys Time Warner
In 2000, AOL acquired Time Warner for $165 billion, aiming to become a dominant player in multiple industries. However, due to the dot-com bubble burst, the merger was unsuccessful and eventually dissolved in 2009.
AT&T’s Deal to Buy Time Warner
In 2016, AT&T announced its $85.4 billion acquisition of Time Warner, completed in 2018 after overcoming legal challenges, enhancing AT&T’s media presence significantly.
Types of Acquisitions
- Vertical: Acquiring a company within the supply chain.
- Horizontal: Buying a competitor within the same industry segment.
- Conglomerate: Acquiring a company in an entirely different industry.
- Congeneric: Acquiring within the same industry but with different product lines.
Purpose of an Acquisition
Acquisitions can expand product offerings, enhance supply chain efficiency, or reduce competition. Each strategy varies based on the parent company’s objectives.
Bottom Line
Acquisitions represent a significant step in corporate growth, allowing firms to gain control over new or existing operations. The primary motivations range from entering new markets, gaining market share, to eliminating competition, with such deals common in the small- and mid-sized business sectors.
Related Terms: mergers, takeovers, investment banks, corporate finance, due diligence
References
- Federal Trade Commission. “Competitive Effects”.
- Time. “A Brief Guide to the Tumultuous 30-Year History of AOL”.
- The New York Times. “What Happened to AOL Time Warner?”
- AT&T. “AT&T Completes Acquisition of Time Warner Inc”.
- Office of Public Affairs U.S. Department of Justice. “Justice Department Challenges AT&T/DirecTV’s Acquisition of Time Warner”.
- CNBC. “AT&T battled the DOJ to buy Time Warner, only to spin it out again three years later”.
- Wall Street Journal. “AtHome Agrees to Acquire Excite In Stock Deal Valued at $7.5 Billion”.
- CNN Money. “Yahoo! Buying BCST.com”.
