Acquisition

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Definition: Acquisition

Acquisition is a concept in business when one company acquires another company. Acquisition strategy is an in-depth, detailed and consolidated plan of a company in order to formulate their growth strategy. Acquisition is comprised of various parts that formulates the overall approach to own more than 50 percent shares of another company. Acquisitions are important in order to create a dominance or strong hold in the market.

Acquisitions come under the purview of corporate growth strategy of a firm and refer to the inorganic way of growing wherein one company acquires at least a controlling stake in another organization. An acquisition is characterized by the fact that after the acquisition the two entities form a new entity and do not exist as separate entities. This is referred to as consolidation.


Elements of Acquisition Strategy

The elements of an effective acquisition strategy are:

1. Target identification – Acquisition will be successful if a thorough research is conducted on the target company. For that the objective needs to be clear i.e. why the acquisition is being done.

2. Information gathering – Once a particular target company has been fixed, information on that particular company has to be gathered to enter into the agreement with full knowledge.

3. Expedite the process – A third party is required in order to ensure a fair agreement.

Acquisition Strategy


Classification of Types of Acquisitions

The acquisitions can be classified in two ways: as public and private or as friendly and hostile.

1. Private acquisition: An acquisition in which the company being acquired (target company) is not listed on a public stock exchange.

2. Public acquisition: An acquisition in which the company being acquired (target company) is listed on a public stock exchange.

In friendly and hostile takeovers, the difference is only in the way the information is communicated to the target company.

1. Friendly takeover: Friendly takeover is an acquisition in which the target company expresses an agreement of being acquired.

2. Hostile takeover: Hostile takeover is an acquisition in which the target company does not explicitly express an agreement of being acquired whereas the acquirer acquires the target by purchasing more and more shares and getting a controlling stake.


Acquisitions generally take place when a company perceives synergies between two companies such that organic expansion seems costlier than the acquisition. The payment for an acquisition can take place either in the form of cash or stocks of the acquiring company or both. Other reasons for acquisition strategy are:

i. Cost-effective

ii. Consolidated business

iii. Greater share of primary market by lowest-cost position

iv. Supplement the existing product line

v. Greater command over the supply line

It provides a roadmap for acquisition approach that needs to be followed for effective acquiring.


Importance of Acquisition in Business

There are two parts to the importance of acquisition in business –

i. Why acquisition is important?

ii. Why acquisition strategy is important for an acquisition?

We will basically deal with the latter, but understanding the former is equally important, if not less. Acquisition is important because of various reasons. It all depends on the goals and values of a specific company

a. Diversification – The company is looking forward to venture into a different market or a different product line or segment in order to have a better brand popularity.

b. Supplementation – The company is aiming to add more products in the existing product line i.e. extension of the product line.

c. Growth – Simply for the growth prospects that is undertaken by every organization after it reaches a certain stage

d. To increase the market share – In order to dominate the market with majority of the recognized products under one brand, acquisitions are important

e. Access to better R&D – A brand might focus on acquiring a company having extremely powerful research and development in order to bring innovation in their product line.


Now coming to the importance of a strategy for acquiring a company, we need to understand that every process is effectively carried out if it follows a proper plan. Same goes for this concept as well. That becomes the primary objective why the companies need an acquisition strategy. Other objectives are:

a. We need to understand that after care is necessary post every operation. In the same way, the process after acquisition is equally important to be taken care of primarily because of few reasons. The way the acquisition will work out will create an image in the market and in front of other companies and if it is not executed properly, it might send a completely wrong signal. The barriers to entry are low initially and to combat that problem, execution has to be top-notch. To ensure all of the above, the plan charted before the acquisition becomes extremely important as that would ensure a guaranteed success.

b. To establish the position of the target company in terms of risk mitigation and security analysis

c. It acts as a foundation for further marketing plan in order to operate the business

d. To exclude the unnecessary costs and find out the ways the revenue ca be increased

e. To generate value for the shareholders


Difference between Acquisition and Merger

We would list down the differences between merger and acquisition.

1. Merger is combination of two different companies whereas acquisition is takeover of one company by another

2. Merger is always friendly whereas acquisition can be friendly as well as hostile, depending on the situation

3. While merging of two different companies, the end product is a new title given to the emerging entity whereas no such method is followed in acquisition. The acquired company simply comes under the name of the acquirer

4. Merger happens between companies that are on the same level whereas acquisition happens between companies that are not of the same level. The acquirer is larger and more renowned that the company that is acquired

5. Power of both the companies remain the same when it comes to merger whereas acquisition results in the acquirer being more powerful

6. Successful example of Merger – DELL-EMC

Successful example of acquisition – Disney-Marvel

Hence, this concludes the definition of Acquisition along with its overview.

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