An acquisition occurs when one company takes control of another existing company by purchasing its assets, shares, or operations. This strategic move allows the acquiring company to assume ownership and control of the target business, often with the goal of expanding its market presence, resources, or competitive advantage.
Definition and Examples of Acquisitions
An acquisition typically happens when one company buys another and integrates its operations and assets. The purchasing entity is known as the acquiring company, while the business being bought is referred to as the acquired or target company.
A prominent example of this is Amazon’s acquisition of Whole Foods Market in 2017. Amazon bought Whole Foods for approximately $13.7 billion, offering $42 per share, which was a 27% premium above the market value at that time. This acquisition helped Amazon expand into the grocery sector and enhance its physical retail presence.
How Acquisitions Work
Acquisitions can result from friendly negotiations, where both companies agree on the terms of the deal. In these friendly acquisitions, the target company agrees to be acquired, and both parties typically negotiate for favorable terms.
However, there are also instances of hostile takeovers, where the acquiring company proceeds without the consent of the target firm’s management. In a hostile takeover, the acquiring firm purchases more than 50% of the target’s shares, often by offering a higher-than-market price to entice existing shareholders to sell their shares.
In either scenario, the acquiring company often pays more than the market value of the shares to secure the acquisition. This difference is called the premium. For example, when Amazon acquired Whole Foods, it offered a significant premium over the share’s current market price to ensure shareholder approval.
Types of Acquisitions
Acquisitions can be completed through various methods of payment:
- Cash Acquisitions: The acquiring company pays the target company’s shareholders in cash in exchange for their shares.
- Stock-for-Stock Exchange: The acquiring company offers its own shares in exchange for the target company’s shares. This is often used when the acquirer wants to avoid large cash outflows.
- Leveraged Buyout: The acquiring company borrows funds to finance the acquisition, often using the target company’s assets as collateral.
Acquisitions vs. Mergers
While the terms acquisition and merger are sometimes used interchangeably, they have distinct meanings. In an acquisition, one company takes over another, and the acquired company ceases to exist as a separate entity. In a merger, two companies combine to form a new, single entity.
| Merger | Acquisition |
|---|---|
| Two companies form a larger entity | One company takes over another |
| Typically by mutual agreement | Can be friendly or hostile |
Pros and Cons of Acquisitions
Acquisitions can offer several benefits but also come with inherent risks.
Pros of Acquisitions
- Economies of Scale: Acquiring a company can result in cost savings by purchasing resources in bulk and increasing operational efficiency.
- Increased Market Share: When a company acquires a competitor, it gains the combined market share of both companies, strengthening its position in the industry.
- Vertical Integration: Acquisitions can lead to vertical integration, where a company buys another business in its supply chain, improving efficiency and reducing costs.
- Synergy: Acquisitions can eliminate redundant functions and reduce operational costs, enhancing profitability through synergy.
Cons of Acquisitions
- Integration Issues: Merging two distinct corporate cultures, systems, and operations can lead to challenges in integration.
- Overestimated Synergies: It may take time to achieve the anticipated cost reductions and efficiency gains after an acquisition.
- Paying Too Much: The acquiring company may overpay to secure the deal, which could strain financial resources or negatively impact shareholder value.
Conclusion
Acquisitions are a strategic business move that can significantly impact a company’s growth and market positioning. While they offer benefits like increased market share and cost savings, they also come with risks, including integration challenges and potential overpayment. Whether through friendly negotiations or hostile takeovers, acquisitions are a critical tool for companies looking to expand or diversify their operations.
Read :
