What is an Acquisition? Definition, Purpose, and Strategic Pros & Cons

What Is an Acquisition in Business?

An acquisition is a corporate transaction where one company purchases part or all of another company’s shares or assets. Business acquisitions are typically pursued to gain control of the target company, leverage its strengths, and capture strategic synergies.

There are several types of business combinations:

• Acquisition: Both companies continue to exist; one becomes the parent company.
• Merger: One company survives; the other ceases to exist.

Amalgamation: A new entity is formed; both original companies cease to exist.

In most acquisitions, the acquiring company purchases shares or assets to gain a controlling interest, which allows it to make key decisions about the acquired entity.

Learn more about the difference between share deals and asset deals.

Acquisition vs. Merger

While often grouped together under the umbrella term M&A (Mergers and Acquisitions), acquisitions and mergers are distinct in both structure and legal implications.

• In an acquisition, one company purchases part or all of another company, but both continue to operate as separate legal entities. The acquiring company typically gains controlling interest and decision-making authority.
• In a merger, two companies legally consolidate into a single entity, with one company ceasing to exist. This is usually done to streamline operations, reduce redundancies, and improve competitive positioning.
• In an amalgamation, both original companies dissolve, and a brand-new company is created. This structure is less common but may be used for complex reorganizations or large-scale integrations.

Understanding these distinctions is important for structuring deals, evaluating risks, and anticipating the operational impact of each transaction type.

Dive deeper with CFI’s M&A Modeling Course to explore real-world deal structures and valuation methods.

Benefits of Acquisitions

Acquiring another company can offer strategic, operational, and financial advantages. For many businesses, it’s a faster and more efficient way to grow compared to organic expansion. Key benefits include:

1. Faster market entry

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. Increased 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. 

3. Benefits from synergies

Synergies are benefits that a company achieves through M&A, such as cost savings or increased revenue, that can increase the combined company’s value.

4. Access to new competencies and resources

A company can choose to take over other businesses to gain competencies and resources it does not currently hold. 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.

5. Access to experts

When small businesses join with larger businesses, they are able to access specialists such as financial, legal, or human resource specialists.

6. 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.

7. Fresh ideas and perspectives

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

While acquisitions can be highly rewarding, they also carry risks and complexities. Poorly planned or misaligned deals can hinder performance and disrupt operations. Common challenges include:

1. Culture clashes

A company usually has its own distinct culture that has been developing since its inception. Acquiring a company with a culture that conflicts with your own 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.

2. Duplication

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 lead to resistance within the acquisition, which can undermine the 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 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.

Key Takeaways

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 gain control of assets. It is less expensive, less risky, and faster 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 materialize, some key employees may be forced to leave, assets may have a lower value than perceived, or company objectives may conflict.

Before considering the acquisition of another business, it is essential to analyze the advantages and disadvantages that the business deal will present. A well-executed strategic acquisition that leverages potential synergies can be one of the most effective ways for a company to achieve growth.

Learn more in CFI’s Introduction to Mergers and Acquisitions Course.

Additional Resources

Thank you for reading CFI’s guide to acquisition. To continue learning, explore these additional CFI resources:

• Bolt-On Acquisitions
• Horizontal Merger
• M&A Considerations and Implications
• Vertical Integration
• See all Valuation resources

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FAQs: Acquisition Definition and Strategy

What does acquisition mean in business?

In business, an acquisition refers to one company purchasing another company’s shares or assets to gain a controlling interest. It’s a strategic tool often used to grow revenue, expand market share, or gain competitive advantages through new capabilities or geographic reach.

What is the meaning of the word acquisition?

When looking to define “acquisition,” it generally means the act of acquiring or gaining possession of something. In a business context, it specifically refers to taking ownership or control of another company through the purchase of its shares or assets.

What is an example of an acquisition?

A common example would be a large technology firm acquiring a smaller startup to gain access to proprietary software, intellectual property, or specialized talent. These types of acquisitions often help the larger company innovate or expand more quickly.

How is an acquisition different from a merger?

An acquisition typically involves one company taking control of another, with both continuing to exist as separate legal entities. In contrast, a merger combines two companies into a single entity, often with one company ceasing to exist legally.

Why do companies pursue acquisitions?

Companies pursue acquisitions for a variety of reasons, including expanding into new markets, reducing competition, gaining access to unique resources or intellectual property, or accelerating growth beyond what organic methods, such as marketing or product development, might achieve.