Acquisitions – What Are They and How Do They Work?
Since the 1990s, the rate of business acquisitions has nearly doubled. It is now one of the most popular means of facilitating business expansion and occurs on a global scale, in markets of all shapes and sizes. To give you a better understanding of what an acquisition involves, we created this handy guide.
An acquisition can be defined as the process by which one company purchases either most or all of another company’s shares and takes control of its operations. The buyer only needs to acquire an ownership stake of more than 50%, though they will often also buy the company's tangible assets (such as property, equipment etc.). It does this to ensure that they can make decisions regarding the company (and its assets) without requiring the approval of the company’s other shareholders.
A company will typically acquire to grow their business at a faster rate than natural, organic growth would allow.
Why do acquisitions occur?
Acquisitions occur for a diverse array of reasons. However, the principal justifications include the following;
- Acquire skills or technologies
It may be quicker, easier, and cheaper to get hold of specific skills or technologies via an acquisition than it would be for a business to develop them itself. Whether it's manufacturing facilities, cutting-edge digital software, or a particular research team or individual, some assets can only be obtained quickly via an acquisition.
- Pick up a high-performing upstart
If a company can identify successful other business ventures while they're still small, they may acquire them to help develop their operations and then reap the financial rewards. Though this is risky – there's always the chance that you're investing in a business that isn't as promising as hoped – it can result in a company acquiring future superstars at a discount rate.
- Minimise competition
Though many companies acquire to help develop a smaller business and incorporate it into their organisation, others do so to eradicate competition. If a company is cutting into your market share or shows signs that it may threaten your dominance, an acquisition could be the best means of ensuring continued profitability. Rather than competing, it may make more financial sense in the long run to acquire a competitor, strip them off their valuable assets, and shut them down.
- Assume control of distribution channels
In the modern economy, products and services travel all over the world. They depend on efficient supply chains and localised knowledge networks to move between and into markets effectively. These chains and networks are often prohibitively expensive and difficult to set up. To get around this, many companies will make an acquisition because the acquired company can provide them with the infrastructure required to get their product or service to market.
Business definition – Is there a difference between acquisitions, takeovers, and mergers?
If you’re at all involved in the business environment, it’s highly likely that you would have heard the terms ‘takeover’ and ‘merger’ used alongside acquisitions. Though the three terms are similar, they all have slightly different meanings or connotations.
For instance, a merger differs from an acquisition in the fact that the deal occurs between two companies who come together in a mutually beneficial relationship, where control is shared. Rather than one company taking over another, two companies make a joint decision that they are stronger as a unified force.
Conversely, a takeover has hostile connotations. While it is often used interchangeably with acquisition, it suggests that the acquired company put up some resistance to the process. This is not uncommon, and the company being taken over does not need to give their consent to the acquisition for it to take place. If they don't, a hostile takeover may occur.
A friendly acquisition takes place when there is no resistance to the deal, and the company to be subsumed does not object to the process. On the other hand, a hostile takeover involves opposition and objections on behalf of the target company.
If they refuse, the hostile company must acquire a majority stake in the desired business to force the deal. The principal means of achieving this is by offering a ‘tender offer.' A tender offer is an offer to buy shareholders' stock in a company at a price that is above the current market value. This is a tempting offer for many shareholders, as it offers a guaranteed pay-out at a price above the company’s value.
Risks associated with acquisitions
As with any business venture, there are a considerable number of risks related to acquisitions. While these can be minimised using thorough due diligence and responsible business forecasting practices, they cannot be eradicated. They include;
- The target company does not perform as expected – Many acquisitions are deemed a failure because the target company does not perform as well as expected. While careful research can reduce the possibility of this occurring, all business deals carry some inherent risk.
- Key members of staff abandon ship – A company's employees are a vital company resource and can often determine the success of a business. In the wake of an acquisition, there's no way of forcing key members of staff to carry on working for the business. If they leave, the company may lose its most valuable assets.
- The two business cultures do not mix – Company culture is a significant contributor to success and informs the way individuals, teams, and departments interact and co-operate within a business. If two cultures that do not mix well are forced together, the result can be jarring, and the acquisition is not likely to run smoothly.
- Expected benefits do not materialise – When discussing the benefits of acquisitions, many aspects of the process will deal with abstract concepts that are difficult to measure and attribute value. For instance, how do you put a concrete value on company culture or a particular skill set? This means that businesses can make mistakes when assessing acquisition targets and overestimate their value. When this occurs, the expected benefits will often fail to materialise once the process is complete.
>> Read more about our CEO definition.