Acquisition – Definition, Meaning and Examples

Definition:

  1. Acquiring is the process of obtaining something or someone by various means.
  2. The acquisition of something or someone is when one person or one company takes control of another.

Examples of acquisition in a Sentence

  • It’s very special to me because it’s a very large acquisition for our company. 
  • The museum is exhibiting its latest acquisitions, including the recently acquired painting.

What Is an Acquisition?

 Acquisition is when one company buys all or part of another company while still functioning as a separate legal entity. Acquisitions are the most successful type of investment you can make because they allow an investor to control a business that is thriving and growing rapidly while capturing the company’s potential. Acquisitions typically involve integrating established businesses into another existing business or product without changing the core function of the target business.

A typical acquisition is a strategic move designed to accelerate growth and profitability while improving operational efficiency. An acquisition candidate typically aims to capture a strong customer, client, supplier, or supplier relationship, and address competitive challenges in complementary areas, advancing the target company’s competitive position.

Why Make an Acquisition?

Companies, both public and private, acquire business units or companies to expand their revenues and profits. Market trends are constantly changing, and acquisition is an excellent strategy for businesses to expand their reach.

As a Way to Enter a Foreign Market

An acquisition is the best option if a company wants to expand its operations in a foreign country because it’s likely built around the same business model. In addition, acquisitions typically come with tax breaks and other special benefits.

As a Growth Strategy

Some companies prefer to acquire when they need growth because it’s faster and cheaper than expanding their operations or strengthening marketplace share without the risks associated with organic growth.

To Reduce Excess Capacity and Decrease Competition

Businesses may choose to acquire another company when they feel it is becoming too big, saturating a market, or using too much revenue.

To Gain New Technology

The acquisition is thought to be cost-efficient for a company to quickly benefit from the technology developed by another company that has already gone through the development process once.

Acquisition, Takeover, or Merger?

In finance, “acquisition” and “takeover” are different concepts. An acquisition is a purchase of another business, while a takeover refers to purchasing a company’s assets. In general, acquisition indicates that both firms have agreed to cooperate; takeover suggests that the target company opposes the purchase, and merger is used when companies combine to form a new entity.

Acquisitions: Mostly Amiable

In a friendly acquisition, the acquiring company buys the target company’s assets; in a hostile acquisition, one firm wants to take over the other firm. The target company’s board of directors (Bod) must approve the deal. The acquiring and target companies develop strategies to ensure that the acquiring company purchases appropriate assets, and they review financial statements for any obligations that may come with the assets. The purchase proceeds once all parties agree to the terms, and all legal meetings have taken place.

Takeovers: Usually Inhospitable, Often Hostile

Unfriendly acquisitions consist of an organization that purchases another company intending to acquire control of the target firm’s economic interest. The word “hostile” is used because the target company is not willing to be bought. Hostile takeovers are generally initiated by outsiders and are rarely supported by management. Hostile acquisitions occur when a company takes over another corporation, where there was no voluntary cooperation from the firm that is being acquired. As such, the acquiring firm must actively purchase large stakes of the target company to gain a controlling interest.

Mergers: Mutual, Creates a New Entity

A merger occurs when one business-private sector partnership and one or more business-public sector subsidiaries merge to form a new entity. When companies merge their activities, they generally focus on increasing efficiency within existing businesses and eliminating unnecessary costs associated with combining operations and activities. The resulting company is usually more profitable overall and tends to pursue a more aggressive growth strategy.

Evaluating Acquisition Candidates

When a company considers an acquisition, it needs to determine whether the target company is a good candidate. What does it mean for a company to be a good candidate?

Is the price right? When companies or investors consider acquiring other companies, they frequently utilize various metrics. The transaction often proves a failure if the price of the target company exceeds typical metrics.

Examine the debt load. A target company with a high level of liabilities indicates decreased cash flow, results in lower profit margins, and increases risk. 

Undue litigation. An acquisition candidate is a company being considered for possible purchase by your company. As would be the case in a normal business transaction, you will want to ensure that the target company’s litigation does not exceed what is reasonable and normal for its size and industry.

Scrutinize the financials. The financial statements of a good acquisition target should be complete, organized, and well-written so that you can perform due diligence quickly and easily.

Key Takeaways

  • Acquisition is when one company buys all or part of another company while still functioning as a separate legal entity. 
  • Acquisitions are the most successful type of investment you can make because they allow an investor to control a business that is thriving and growing rapidly while capturing the company’s potential.
  • Acquisition indicates that both firms have agreed to cooperate; takeover suggests that the target company opposes the purchase, and merger is used when companies combine to form a new entity.

Examples of acquisition

  1. Amazon spent $13.7 billion to acquire Twitch in 2014. In this type of transaction, the acquirer owns all outstanding shares and has the right to appoint all current officers and directors of the target company. In other words, an acquisition results in the permanent ownership of a business even if the target company goes through some form of radical change (such as being converted into a public company or a spin-off).
  2. Microsoft buying Nokia’s mobile phone business for $7.5 billion in 2014. In 2014 alone, Microsoft has purchased more than $30 billion in assets under management, showing they are willing to invest in risky projects.