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, in new medications, a pharmaceutical firm may decide to use those funds to buy a firm with promising drugs in the pipeline.
Acquisitions can facilitate rapid market expansion or diversification, allowing a company to quickly adapt to changing market conditions or consumer demands without the longer lead times associated with organic development.
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 consist of your stocks, which will represent 25% of the new entity, plus ours, which will make up the remaining 75%.”
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.
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.
Merger vs. 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.
Following the collapse of the Comcast-Time Warner deal, regulatory scrutiny on similar large-scale mergers intensified, leading to more rigorous antitrust reviews for future transactions.
Subsequent to this heightened regulatory environment, companies seeking mergers or acquisitions began to invest more heavily in legal due diligence to anticipate and address potential antitrust concerns before announcing deals.
Mergers & Acquisitions vocabulary
There are many words associated with M&A (mergers and acquisitions). Let’s take a look at some of them, understand their meanings, and see how we can use them in a sentence:
M&A (Mergers and Acquisitions)
The process in which companies consolidate through various types of financial transactions, including mergers, acquisitions, consolidations, tender offers, purchase of assets, and management acquisitions.
Example: “The M&A deal between the two leading tech companies created a behemoth in the industry.”
A corporate strategy of combining different companies into a single company in order to enhance the financial and operational strengths of both entities.
Example: “The merger of the automobile manufacturers was intended to pool their resources and capitalize on shared technology.”
The acquisition of one company, known as the target, by another, referred to as the acquirer, that aims to gain control of the target company’s operations and policies.
Example: “The board of directors is considering a takeover bid from a competitor that is looking to expand its market share.”
A type of takeover where the acquiring company attempts to take control of the target company without the agreement or cooperation of the target company’s management.
Example: “The CEO braced for a hostile takeover after a rival business started buying up large amounts of their stock.”
An offer to purchase some or all of shareholders’ shares in a corporation. The price offered is usually at a premium to the market price.
Example: “The corporation launched a tender offer to acquire a controlling stake in its supplier.”
The company that is attempting to purchase another company.
Example: “The acquirer made a generous offer to the shareholders of the target company.”
The company that is being pursued for purchase by the acquirer.
Example: “The target company’s defensive strategies successfully thwarted the hostile takeover bid.”
These three YouTube videos come from our sister channel, Marketing Business Network. They explain what the terms “Acquisition”, “Merger”, and “M&A (Mergers and Acquisitions)” mean using easy-to-understand language and examples:
What is an Acquisition?
What is a Merger?
What is M&A (Mergers & Acquisitions)?