What is an Acquisition?
An acquisition is defined as a corporate transaction where one company purchases a portion or all of another company’s shares or assets. Acquisitions are typically made in order to take control of, and build on, the target company’s strengths and capture synergies. There are several types of business combinations: acquisitions (both companies survive), mergers (one company survives), and amalgamations (neither company survives).
The acquiring company buys the shares or the assets of the target company, which gives the acquiring company the power to make decisions concerning the acquired assets without needing the approval of shareholders from the target company.
Learn more about share deals vs asset deals.
Acquisition vs. Merger
Mergers and Acquisitions (M&A) are similar transactions, however, they are significantly different legal constructs.
In an acquisition, both companies continue to exist as separate legal entities. One of the companies becomes the parent company of the other.
In a merger, both entities combine and only one continues to survive while the other company ceases to exist.
Another type of transaction is an amalgamation, where neither legal entity continues to survive. Instead, an entirely new company is created.
Learn more in CFI’s M&A Modeling Course.
Benefits of Acquisitions
Acquisitions offer the following advantages for the acquiring party:
1. Reduced entry barriers
With M&A, a company is able to enter into new markets and product lines instantaneously with a brand that is already recognized, with a good reputation and an existing client base. An acquisition can help to overcome market entry barriers that were previously challenging. Market entry can be a costly scheme for small businesses due to expenses in market research, development of a new product, and the time needed to build a substantial client base.
2. Market power
An acquisition can help to increase the market share of your company quickly. Even though competition can be challenging, growth through acquisition can be helpful in gaining a competitive edge in the marketplace. The process helps achieves market synergies.
3. New competencies and resources
A company can choose to take over other businesses to gain competencies and resources it does not hold currently. Doing so can provide many benefits, such as rapid growth in revenues or an improvement in the long-term financial position of the company, which makes raising capital for growth strategies easier. Expansion and diversity can also help a company to withstand an economic slump.
4. Access to experts
When small businesses join with larger businesses, they are able to access specialists such as financial, legal or human resource specialists.
5. Access to capital
After an acquisition, access to capital as a larger company is improved. Small business owners are usually forced to invest their own money in business growth, due to their inability to access large loan funds. However, with an acquisition, there is an availability of a greater level of capital, enabling business owners to acquire funds needed without the need to dip into their own pockets.
6. Fresh ideas and perspective
M&A often helps put together a new team of experts with fresh perspectives and ideas and who are passionate about helping the business reach its goals.
Challenges with Acquisitions
M&A can be a good way to grow your business by increasing your revenues when you acquire a complimentary company that is able to contribute to your income. Nevertheless, M&A deals can also create some hitches and disadvantage your business. You must take these potential pitfalls into consideration before pursuing an acquisition.
1. Culture clashes
A company usually has its own distinct culture that has been developing since its inception. Acquiring a company that has a culture that conflicts with yours can be problematic. Employees and managers from both companies, as well as their activities, may not integrate as well as anticipated. Employees may also dislike the move, which may breed antagonism and anxiety.
Acquisitions may lead to employees duplicating each other’s duties. When two similar businesses combine, there may be cases where two departments or people do the same activity. This can cause excessive costs on wages. M&A transactions, therefore, often lead to reorganization and job cuts to maximize efficiencies. However, job cuts can reduce employee morale and lead to low productivity.
3. Conflicting objectives
The two companies involved in the acquisition may have distinct objectives since they have been operating individually before. For instance, the original company may want to expand into new markets, but the acquired company may be looking to cut costs. This can bring resistance within the acquisition that can undermine efforts being made.
4. Poorly matched businesses
A business that doesn’t look for expert advice when trying to identify the most suitable company to acquire may end up targeting a company that brings more challenges to the equation than benefits. This can deny an otherwise productive company the chance to grow.
5. Pressure on suppliers
Following an acquisition, the capacity of the suppliers of the company may not be enough to provide the additional services, supplies, or materials that will be needed. This may create production problems.
6. Brand damage
M&A may hurt the image of the new company or damage the existing brand. An evaluation of whether the two different brands should be kept separate must be done before the deal is made.
When a company is looking to expand, one way many business owners consider doing so is through the acquisition of another similar business. An acquisition is a great way for a company to achieve rapid growth over a short period of time. Companies choose to grow through M&A to improve market share, achieve synergies in their various operations, and to gain control of assets. It is less expensive, less risky, and faster, as compared to traditional growth methods such as sales and marketing efforts.
While an acquisition can create substantial and rapid growth for a company, it can also cause some problematic issues along the way. Several things can go wrong even when there is a well-laid plan. There may be a clash between the different corporate cultures, synergies may not match, some key employees may be forced to leave, assets may have a lower value than perceived, or company objectives may conflict.
Before putting the acquisition of another business into consideration, it is essential to analyze the advantages and disadvantages that will be presented by the business deal. A well-executed strategic acquisition that takes advantage of potential synergies can be one of the best ways for a company to achieve growth.
Learn more in CFI’s Mergers and Acquisitions Course.
CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful: