Definition
An acquisition in finance refers to the process where one company purchases most or all of another company’s shares to take control of that company. Often seen as a growth strategy, it allows the acquiring firm to enter a new market or sector, improve its operations, or eliminate competition. The acquired company can either merge into the acquiring company or operate as a subsidiary.
Key Takeaways
- The term “Acquisition” refers to the process through which one company purchases most or all of another company’s shares to gain control over that company. This strategy is often utilized to quickly grow or achieve a competitive advantage in the industry.
- An acquisition can be friendly or hostile. In a friendly acquisition, both companies agree to the deal, whereas in a hostile acquisition, the purchasing company bypasses the board of directors of the target company and instead offers to purchase the shareholders’ shares directly, often at a premium.
- Acquisitions can have significant financial and operational implications for both companies involved. These effects may include changes in company leadership, branding, and strategic direction, as well as potential job losses, shifts in the market dynamics, and impacts on shareholders.
Importance
Acquisition, a crucial term in finance, refers to the process wherein one company purchases most, if not all, of another company’s ownership stakes to assume control of the targeted firm.
This business strategy is significant as it may help a company to quickly grow its new line of business, achieve economies of scale, increase market share, gain unique capabilities or assets, or eliminate competition.
Notably, the effects of an acquisition have a profound influence on the resulting company’s competitiveness and financial health, shaping the business landscape in significant ways.
Thus, understanding acquisitions is vital for investors, financial analysts, and company management.
Explanation
An acquisition is a finance term that refers to the purchase of one company by another, and it serves multiple strategic purposes in the world of business. The primary goal is often to achieve the business scale rapidly that otherwise may take many years to build organically.
Acquisitions allow the purchasing company to enter new markets, acquire new technology or intellectual property, gain access to resources, or eliminate competition. It can be a critical way to supplement a company’s growth or to expand its reach into new segments of the market.
Apart from the strategic expansion and growth, acquisitions can also provide significant cost efficiencies and synergy. If the acquired company is in the same line of business, the acquiring company can achieve economies of scale by consolidating overlapping operations and reducing costs.
In other cases, the acquisition might support a company to fill gaps in its product or service offerings, diversify its portfolio, or to obtain new capabilities. Altogether, the purpose and usage of acquisitions are diverse and encompassing, providing both short-term and long-term benefits depending on the motivation behind them.
Examples of Acquisition
Facebook’s Acquisition of Instagram: In 2012, Facebook acquired Instagram for approximately $1 billion in cash and stock. This is a classic example of a large company acquiring a smaller, fast-growing startup.
Disney’s Acquisition of 21st Century Fox: In March 2019, Disney acquired 21st Century Fox for $
3 billion, which included film and television studios, cable and international TV businesses. This acquisition allowed Disney to significantly expand its portfolio of entertainment properties.
Microsoft’s Acquisition of LinkedIn: In December 2016, Microsoft completed its acquisition of LinkedIn, the professional social networking site, for $
2 billion. This acquisition was geared towards bringing together the world’s leading professional cloud and professional network to increase productivity and enhance business processes.
FAQs about Acquisition
What is an Acquisition?
An acquisition occurs when one company purchases most or all of another company’s shares to gain control of that company. Acquisitions are often made as part of a company’s growth strategy when it is more beneficial to take over an existing firm’s operations than it is to expand on its own.
What is the difference between a Merger and an Acquisition?
Although they are often used interchangeably, the terms merger and acquisition mean slightly different things. When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer “swallows” the business and the buyer’s stock continues to be traded. In the pure sense of the term, a merger happens when two firms, often of approximately the same size, agree to go forward as a single new company rather than remain separately owned and operated.
What are the advantages of an Acquisition?
Acquisition helps a business expand into new segments of the market. The advantage of this method is that the company increases its market share within its industry, making it a more formidable competitor. The increased market share can result in a higher rate of return and increased profitability.
What are the challenges of an Acquisition?
There can be various challenges in an acquisition, including the difficulty of integrating different corporate cultures and management styles, over-valuation of the target company, or regulatory issues. The financial risks for the acquirer’s shareholders also increase as they now bear the risk associated with the company that they purchase.
Does an Acquisition affect company’s stocks?
Yes, the acquisition of a company can often lead to a short-term increase in the stock price of the acquiring company. This is because investors often see synergies in the combination of the two firms that will increase profits and reduce costs in the future.
Related Entrepreneurship Terms
- Mergers and Acquisitions (M&A)
- Due Diligence
- Acquisition Financing
- Asset Acquisition
- Share Purchase Agreement (SPA)
Sources for More Information
- Investopedia: An in-depth and reliable source for finance and investment explanations.
- Financial Times: A global publication that provides news, analysis, and deep dives into financial topics.
- Morningstar: Offers meticulous investment research and analysis.
- Bloomberg: Known for quick, global financial updates and detailed articles on finance and economics.
