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What is an Acquisition?

An acquisition is a deal where one firm buys a fraction of or all stocks of the other organization to gain operational control. Here, two parties are involved, the acquirer and the target company.

In a business combination, the investment gives the acquirer a controlling interest. However, it does not affect the target firm’s brand name and autonomy. It only assists with entering a new industry and utilizing the resources and skills of the acquired organization.

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Key Takeaways

A corporate combination known as an acquisition occurs when one company purchases the majority or all of the shares of another organization.

There are four types of acquisition: Horizontal, vertical, congeneric, and conglomerate.

Mergers are distinct from acquisitions as, in a merger, only one entity remains after the union, and the other corporation no longer exists.

How do Acquisitions Work?

The acquisition is a form of a business combination. It is when a firm acquires an established business to grow itself. As with most business combinations, the percentage should be at least 50% or more. However, transactions with less than 50% interest but significant controlling influence can sometimes occur.

The method of accounting used for all business combination transactions under both IFRS and US GAAP is known as the ’Acquisition’ method. When it is less than 100% of the target company, the minority interest shows on the consolidated balance sheet of the acquiring company.

Examples

Square Inc.’s acquisition of Afterpay

In 2023, Afterpay stated that Square would buy the company’s issued shares. On January 31, 2023, the companies finalized the acquisition. The worth was based on the closing price as of July 30, 2023, which was $29 billion. The purchase occurred in stock. The purpose was to improve the firm’s ability to create appealing economic services and products. It expanded the ease of accessibility and generated extra revenue for the companies.

Google’s Acquisition of Motorola Mobility

In 2011, Google announced its acquisition of Motorola Mobility. After less than a year, in May 2012, Google finally acquired the company. Motorola operated as an independent entity post-acquisition. The main aim of this was to develop the patents owned by Motorola and prevent the misuse of Google’s Android software.

Google had significant control over Motorola, wherein it could change key personnel, sell off parts of the company to various entities, etc. After owning it for 2-3 years, Google sold it to Lenovo. This deal involved making payments to Motorola shareholders in cash. It meant that Google didn’t want to dilute its control after the acquisition, as it wanted to make hard decisions without resistance from Motorola shareholders.

Walmart’s Acquisition of Flipkart

After more than twenty months of negotiations, Walmart Inc. acquired a 77% share in India’s online retailer Flipkart for $16 billion in 2023. It marks the largest e-commerce business acquisition in the country and the entire world.

Types

1. Horizontal

It is when a company acquires a competitor from the same business industry.

To survive in the market, companies must consistently increase their market share.

Therefore, they will have to offer higher-quality goods or buy the rival to drive out the competition.

For example, one telecom company acquires another, like Facebook acquiring, Instagram, and Whatsapp.

2. Vertical

It is when a company acquires either a supplier, distributor or a company that buys its products.

It provides companies with more control over the supply chain.

Generally affects how raw materials are received and goods are delivered. It, in turn, impacts input sources and product delivery to customers.

For instance, a garment company buys the source of cotton, such as a farm like Ikea buying a forest in Romania.

3. Conglomerate

This acquisition occurs between companies that have nothing in common. Here, a company acquires another from a completely different kind of business.

The primary purpose is diversification. These acquisitions make it possible to provide other companies’ clients with the company’s products.

It aids the company’s business expansion, client base growth, and improved economies of scale.

One example is the acquisition of Tanishq by Titan.

4. Congeneric

It occurs between businesses in the same sector offering distinct product lines.

These businesses will have something in common: the marketplace, the technologies, or the production cycle.

By combining their markets, these two businesses can expand their product offerings.

For example, Citicorp’s acquisition of Travelers Group.

Difference Between Acquisition & Merger

Merger

A merger happens when two companies get together to establish one new business.

Both companies combine their assets and liabilities and become more prominent in size and operations.

As the target company dissolves, there is no other form of a financial statement than the consolidated ones in a merger transaction.

The companies that enter into a merger agreement have comparable sizes so that they can profit from the synergy.

A merger is always a favorable transaction.

Acquisition

In this, both the target and the acquirer continue to exist post-acquisition

The acquirer publishes the consolidated financial statements

The purchasing business frequently imposes its will on the acquired company during an acquisition, creating an apparent power gradient.

It can be a friendly buyout or a hostile takeover if the target firm objects.

Its primary motive is to introduce diversity.

Acquisition Process

The process of buying a business is challenging and subject to many laws. Here are steps to the operation of acquisition.

1. Planning

Making a plan and considering the motive for purchasing a business is the initial step of the process.

Consider the resources needed to expand into new markets, reduce competition, or hire new workers.

Creating an acquisition strategy that maximizes the company’s potential while requiring the fewest resources is essential.

Building an acquisition team that completes the entire process effectively is also crucial.

2. Research

Next, research the company you want to acquire.

Visit the firm’s management facilities, meet the executives, and look over the key components of the business.

In addition, you must request the past three to six years’ worth of accounting data, an annual assessment of the owner’s perks, and a list of the major clients.

3. Prepare Documents

Review the corporation’s public records.

Examine job postings, websites, blogs, SEC filings, and any additional information that can help create the deal.

Some essential documents are NDA, LOI, acquisition agreement, and others.

4. Make a Proposal

Work out the details, including why the business is encouraging the sale.

Work through the soft difficulties once both parties agree on a price.

Determine who will remain employed by the company and who will be required to dismiss.

Focus on the element of the business most beneficial to you, and build your proposal around that perk.

5. Sign the Contract

After negotiating and arriving at an end agreement, companies can create contacts.

Hiring a lawyer for the same is preferable.

After drawing up the contract, both parties sign it.

Acquisition Strategy

These are a few tips for businesses looking to acquire another company.

Every company has different work environments. These are called work cultures. Before acquiring a firm, keep in mind the cultural differences. Employees and management may have difficulty settling in if they are too varied. As a result, it may lead to distress for the business.

While acquiring another business, make sure the proposal benefits both the business and not just the acquirer. Even though the company is ready to be accepted, it is still looking to profit from it. Thus, it should be profitable for both parties.

All acquirers must set a specific limit on the investment value. Analyze your own business and the business you are looking to acquire. Create an investment limit and stay within those bounds.

Sometimes, some acquisitions appear valuable in the beginning but may not seem the same after you have reached the middle of the process. Going through with it may lead to failure. Therefore, exit the deal if it doesn’t match your goals.

Special Purpose Acquisition Company

A special purpose acquisition company (SPAC) intends to raise money through an initial public offering (IPO) to purchase another business. Shareholders or sponsors knowledgeable about a specific industry establish these to pursue opportunities.

The funds that SPACs raise go into an equity trust fund. They can only use the money to finalize an acquisition. If the SPAC dissolves, the funds return to shareholders. To avoid liquidation, a SPAC has two years to conclude a transaction.

Cost of Acquisition

Acquisition cost is the total amount paid to buy another business. It, however, presents the value before applying taxes. This cost depicts the actual capital acquired by the company, including legal fees, commissions, etc.

One of the ratios is the exchange ratio, which calculates the shares the acquired company’s shareholders will gain. After the acquisition, the company’s shareholders get a relative amount of shares.

Exchange Ratio = Acquired company’s share price / Purchasing company’s share price.

Conclusion

The acquisition is a business combination under the US GAAP classification, while no distinction exists under IFRS. It is when another firm acquires a company. Post-acquisition, both entities exist, but the acquirer has significant control over the decision-making and the assets and liabilities of the target company.

FAQs 1. What is an acquisition? What is its purpose?

Answer: The acquisition is a business combination, an inter-corporate investment strategy in which a company acquires a target. The parent firm might achieve a variety of goals through acquisitions. It might enable the business to broaden the scope of its offers or product lines. On the other hand, buying companies that feed into its supply chain can reduce expenses. It can even purchase rival companies to keep market share and lessen rivalry.

2. What is the main difference between a Merger and an Acquisition?

Answer: The primary difference between the two is that during an acquisition, the acquiring business assumes complete control of the target company and eventually incorporates it into the parent organization. A merger means that the target company will no longer exist after the merger, leaving only the acquiring company, which in most situations, will become a more substantial organization after the merger.

3. How long does it take for an acquisition to complete?

Answer: Typically, an acquisition takes 4 to 6 months, but this time frame can change depending on the acquirer’s and the target company’s priorities. It can take up to several years as well.

4. What is the federal acquisition regulation?

Answer: The primary collection of regulations concerning public procurement in the United States is the Federal Acquisition Regulation. Its goal is to establish standards and guidelines that federal agencies can use while conducting procurement operations. These regulations offer a standard yet adaptable purchasing system to perform federal contracts in a straightforward, equitable, and objective manner.

5. What are the challenges of an acquisition?

Answer: Among various acquisition challenges, a few are incorrect target firms, excessive payment, uncalculated risks, losing shareholder confidence, and more.