Acquisition In Business: Meaning, Types, Pros & Cons

One way or the other you just might have heard about several big-name business acquisitions either on the news or from close associates. For instance, the acquisition of Instagram and Whatsapp by Facebook.

Business acquisition happens so often that entrepreneurs or company owners don’t have to do too much to reach an agreement on a Business transfer. It takes several forms, from friendly agreements and mergers to sometimes antagonistic takeovers. This article details all you need to know about an acquisition in business, how it works, and the benefits thereof.

What is an Acquisition?

When considered in business terms, it is simply the purchase of a portion or all of a company’s shares or assets. Acquisitions are made to take ownership and control of a target company and improve on the strengths to promote profit.

When a company acquires another company or business, it gains ownership and overall decision-making in the purchased company. For there to be an acquisition, an agreement must be reached either amicably or through hostilities.

In most cases, investors often search for companies or firms that are available for acquisition. To acquire the desired company, the purchasing company or firm will need to buy more than half of the other company’s shares and assets. By doing this, the purchasing company clings to the ownership of the desired company; this gives the acquiring company the authority to make decisions on the acquired assets regardless of the approval of major shareholders from the purchased company. However, it may not require a change of the company’s name, objective, or structure.

Based on the situation and settings, an acquisition can be organized by a common agreement between the two companies involved. This includes their board of directors, key shareholders, and active members.

The majority of acquisitions involve purchasing 50% or more of the desired company’s shares and assets. This is otherwise known as a “majority investment”. Majority investments grant the acquiring company the power to decide on the actions to be taken by the company without requiring permission from the board of directors of the desired/target company.

The Process of Acquisition

Acquisitions are usually beneficial to both parties actively involved. The acquiring company is set out to acquire the target company’s strengths as well as weaknesses or lapses for its purposeful profit/gain. The target company on the other hand is provided with a capital increase via the sales of its shares at a valuable price.

A company in search of an increase in its market presence through acquisition looks for available and prospective companies with good market value to acquire. After locating a target company, the acquiring company contacts the target company to establish their interest in an acquisition.

Acquisition can be the amicable outcome of friendly negotiations between two firms in which the target company accepts the acquisition and agree on the proposed terms, this is also known as a Friendly Takeover, and it is the most common way of acquisition in businesses.

The other means of acquisition is through the use of force by the acquiring company on the target company. In some cases, the target company may be reluctant to come to terms of an agreement with the acquiring company, this result to the acquiring company purchasing a portion or the entirety of the target company’s shares. They do this by offering to pay a higher price for the shares of the existing shareholders, far more than what they could profit from the open market, thereby luring them to sell reluctantly. This is also commonly referred to as a Hostile Takeover.

However, hostile takeovers can only happen should the target company be listed as a public company. Whether or not the acquisition is handled amicably or with hostility, the acquired shares from the target firm are usually purchased at a price far more than their current market value. Otherwise known as the “Premium”.

Types of Acquisitions

Acquisitions are usually carried out via monetary payments for the shares of the major shareholders of the target company. The Process Of acquisition takes different forms and can happen as a result of several reasons. Here are a few:

Horizontal Acquisition

This is an acquisition strategy that involves the merging of one or more companies/firms with another that operates in the same line of business. The combination of companies results in a synergistic relationship that leads to an improved competitive position due to increased market share.

Horizontal acquisitions expanded the capacity of the acquiring company, however, the fundamental business operations are maintained, and rather than being changed entirely, it is improved.

Vertical acquisition

This form of acquisition happens when a firm or company purchases another firm in an entirely different aspect of the supply chain for the goods and services they market.

It provides an alternative method of increasing the market share by controlling access to supplies. Vertical acquisition usually results in superfluity.

Conglomerate acquisition

A conglomerate acquisition is the combination of firms or companies in various firms operating in different geographical locations. It provides an opportunity for the reduction in capital costs while accomplishing other efficiencies necessary for productivity.

There is no competition here, as the two firms involved operate in separate markets. The conglomerate acquisition is done simply for the purpose of; reaching synergy, reducing risk, and expanding into new markets and ventures.

Benefits of Acquisition in Business

Below are some of the benefits of acquisition that can be considered by the prospective acquirer

Improve Market Power

An acquisition can help the acquirer or acquiring company to increase its market share rapidly by merging market powers. Due to the synergy that comes with an acquisition, market presence is enhanced and as well competition reduced also as the acquiring company gains a competitive advantage in the marketplace.

Reduced production costs

As a result of merging with another company that has production capacities and facilities, production costs are reduced by the utilization of these resources.

Access to Expertise

By merging small-scale businesses with large-scale businesses, there is free and easy accessibility to experts, professionals, and specialists like legal and financial specialists.

Access to Capital

Following an acquisition, easy access to Capital as a synergistic company is enhanced. As a result of the agreement, there is availability and equal accessibility to funding and capital.

Pros and Cons of Acquisitions

The major reason for venturing into acquisition in business is to improve financial gain, although as businesses go, there are bound to be some risks involved.