The business term ‘acquisition’ refers to the purchase of all or most of a target company’s shares in order to gain control of it. This can be done by another company or a public body, such as a local or national government.
Some businesses opt for acquisitions rather than research and development in their growth plans. Instead of investing money, for example, on new medications, a pharmaceutical firm may decide to use those funds to buy a firm with promising drugs in the pipeline.
Acquisitions are frequently carried out using cash, trading stocks, or a combination of both. For example, a large company may say to a smaller one “If we merge, the new company will consists of your stocks, which will represent 25% of the new entity, plus ours, which will make up the remaining 75%.”
When the target company does not want to be acquired, it is called a hostile acquisition or hostile takeover.
A friendly or hostile takeover
In a friendly acquisition (takeover), the company being bought says it is happy with the deal. In such cases, after carrying out the necessary negotiations on price or share values, and due diligence (a comprehensive appraisal of a firm undertaken by a prospective buyer) has been done, the completion of the transaction is generally fairly straightforward.
A hostile acquisition on the other hand, means the target business does not want to be bought. The acquiring company will have to aggressively purchase large stakes of the target business in order to gain a majority shareholding.
The predatory company in both a friendly and hostile acquisition will usually offer a premium on the market price of the target company’s shares, in order to encourage shareholders to sell.
Facebook’s purchase of WhatsApp was a friendly acquisition.
Some acquisitions are carried out by corporate raiders, companies that buy other firms, and then sell off their assets separately at a profit. This practice is known as asset stripping.
What’s the difference between a merger and an acquisition
If Google, for example, wanted to buy a company (fictitious) called Fitumbau, but wished keep its name (Google), it would be absorbing the smaller company – this would be an acquisition.
Lets imagine, however, Google and computer giant Apple wanted to marry and make one company. The new entity would probably have a different name, such as GoApple or Appoogle. This would be a merger.
A merger is a marriage, while an acquisition is a purchase – a predatory move to absorb a business.
You will often read the word ‘merger’ used, when really it is a straightforward acquisition (takeover).
Some mergers and acquisitions are huge
In 2014, Facebook Inc. bought instant messaging app for smartphones – WhatsApp – for $19 billion in a cash and stocks deal.
Comcast proposed to buy Time Warner Cable on February 13th, 2014. The deal, which everybody thought would go through, was to take the form of a stock swap (where one company offers its shares at a pre-determined rate in exchange for the other company’s shares), estimated then to be worth approximately $45.2 billion. So really, it was a merger, but the two terms (merger, acquisition) were bandied about by both sides, and the financial press, as if they had the same meaning.
Comcast filed a public interest statement at the Federal Communications Commission on April 8th, 2014. Comcast shareholders approved the proposed deal on October 8th, 2014. Time Warner shareholders approved on October 9th, 2014.
However, on On April 24, 2015, Comcast said that it had terminated the agreement. So, the proposed marriage of America’s two biggest cable companies never made it down the altar.