What is an Acquisition?
An Acquisition is a corporate strategy in which one company purchases a controlling interest or the entirety of another company’s assets or shares to expand operations, enter new markets, or gain competitive advantages. It is one of the most common forms of business expansion and consolidation in corporate finance.
Definition
An Acquisition is the purchase of one company by another, where the acquiring firm obtains control over the target company’s operations, assets, or shares.
Key Takeaways
- Acquisition involves one company gaining control over another through asset or share purchase.
- Distinct from a merger, where two companies combine to form a new entity.
- Can be friendly or hostile, depending on whether the target company’s management consents.
- Used to achieve strategic, financial, or operational synergies.
- Regulated by corporate, antitrust, and securities laws in most jurisdictions.
Understanding Acquisitions
Acquisitions occur for a variety of strategic reasons, including market expansion, diversification, technology acquisition, cost reduction, or elimination of competition. The acquiring company typically pays in cash, stock, or a combination of both.
Once acquired, the target company may continue operating as a subsidiary or be fully integrated into the parent organization. The process involves valuation, due diligence, negotiation, and regulatory approval.
Acquisitions can be friendly, with cooperation from the target company, or hostile, where the acquirer pursues control despite resistance. Hostile takeovers often occur through tender offers or proxy battles.
Formula (If Applicable)
While no single formula defines an acquisition, valuation often involves financial metrics such as:
Enterprise Value = Market Capitalization + Total Debt – Cash and Cash Equivalents
This figure helps determine the fair purchase price for the target company.
Real-World Example
- Microsoft’s Acquisition of LinkedIn (2016): Microsoft acquired LinkedIn for $26.2 billion to strengthen its professional networking and data integration capabilities.
- Amazon’s Acquisition of Whole Foods (2017): Amazon purchased Whole Foods for $13.7 billion, entering the grocery retail market and expanding physical store presence.
- NVIDIA’s Acquisition of Arm (Attempted, 2020–2022): Blocked by regulators citing antitrust concerns — highlighting the complex oversight in global M&A deals.
Importance in Business or Economics
Acquisitions drive corporate growth, innovation, and market restructuring. They allow companies to:
- Enter new markets or industries rapidly.
- Gain new technologies, intellectual property, or talent.
- Achieve economies of scale and cost efficiencies.
- Increase shareholder value through synergy realization.
Economically, acquisitions influence industry consolidation, competition, and employment patterns, often serving as key indicators of business cycle momentum.
Types or Variations
- Horizontal Acquisition: Between companies in the same industry (e.g., Facebook acquiring Instagram).
- Vertical Acquisition: Between companies in different stages of the supply chain (e.g., a manufacturer acquiring a supplier).
- Conglomerate Acquisition: Between unrelated businesses for diversification (e.g., Berkshire Hathaway’s portfolio model).
- Reverse Acquisition: Private company acquires a public one to bypass IPO procedures.
Related Terms
- Merger
- Takeover
- Consolidation
- Synergy
- Due Diligence
Sources and Further Reading
- U.S. Securities and Exchange Commission (SEC): https://www.sec.gov
- Investopedia – Acquisition: https://www.investopedia.com/terms/a/acquisition.asp
- Harvard Business Review – Why So Many Mergers Fail and What to Do About It: https://hbr.org
Quick Reference
- Purpose: Gain control, expand operations, or achieve synergies.
- Methods: Asset purchase, stock purchase, or merger.
- Forms: Friendly or hostile.
- Outcome: Target becomes part of the acquiring firm.
- Risks: Overvaluation, cultural clash, regulatory hurdles.
Frequently Asked Questions (FAQs)
What is the difference between a merger and an acquisition?
In a merger, two companies combine into a new entity, while in an acquisition, one company absorbs another.
How are acquisitions financed?
Through cash payments, stock exchanges, debt financing, or a combination of these methods.
Why do some acquisitions fail?
Common causes include poor integration, overpayment, and cultural mismatches.
What are synergies in acquisitions?
Synergies are the cost savings or revenue enhancements expected when two companies combine their operations.
