What is an acquisition?
An acquisition happens when one company purchases the majority, or all of another company’s shares to gain control of that company.
Why do companies make an acquisition?
There can be a few different reasons for a company acquiring another. It usually comes down to their plans to grow the company. The targeted company could have something the buying company wants but can’t develop internally or doesn’t want to develop internally. Some other reasons for making an acquisition can also include:
- Gaining new technology – if a company has already spent time developing new technology, it can be easier for a buying company to acquire the existing company rather than spending time and money developing it itself.
- Reduce competition – if there’s too much competition in the market, companies could look to acquire other companies to build their own brand.
- Company growth – occasionally a company could be going through logistical issues that prevent its ability to grow. In these instances, it could be easier for the company to acquire another company in order to expand the business.
- To enter a foreign market – if a company wants to expand overseas, it could acquire an existing company overseas to enter that foreign market. The overseas business will already have some brand authority, employees and can be a solid foundation to entering a new market.
One company acquiring another isn’t a simple process. There are several stages to the process including negotiations on valuation, contracts and financing the deal. All of this means a company’s share price for the purchaser and seller can move up and down a lot during this time, and it’s possible the deal could fall through.
What is the difference between an acquisition, takeover and merger?
Although acquisition, takeover and merger are all terms that have similar connotations, there are a few slight differences.
- Acquisitions – overall is amicable between both companies and is agreed by directors. Both companies will usually work together to process the acquisition. Once both companies have agreed to the terms and have met any legal requirements, they’ll proceed with the purchase.
- Takeovers – these can happen when a targeted company doesn’t want to or is resistant to the acquirement. The acquiring firm needs to actively purchase large stakes of the target company to gain a controlling interest, which eventually forces the acquisition. It suggests the targeted firm isn’t equal to the acquiring firm.
- Mergers – creates a new company, by merging two companies together into a new legal entity. Mergers usually happen when the two companies are roughly equal in terms of their size, customers and the size of their operations. The merging of the companies is usually mutual as they believe by joining forces, they will be more valuable to all.
Who is involved in an acquisition?
- Purchaser – the party making the acquisition by signing the relevant documents and paying the agreed purchase price, and who then directly or indirectly owns or controls the target company's shares or assets (depending on what’s sold) once the transaction closes.
- Seller – the party selling the shares or assets, being either the private company or persons who own such shares or assets, or the Board of Directors and management team in a public company.
- Target – the company that’s the subject of a merger or acquisition attempt.
- Advisers – key advisers on the purchaser and seller side of the transaction, including lawyers to advise on the content of key contracts, structuring of the transaction and timing of the transaction, as well as specialist financial and tax advisers.
- Management (relevant to Private Equity transactions) – directors and key senior employees of the Target company, who may invest together with the Purchaser in the acquisition of the Target company or alternatively be involved in selling the Target company.
Read more related glossary terms
A Rights Issue is where existing shareholders are given the opportunity to buy a set number of new shares in the company they own.
Share buybacks are when a company buys back a certain proportion of its shares. They’re also known as share repurchases.