Definition
Types of Acquisition in finance refers to the various methods companies use to merge with or acquire another company. This can include stock purchases, asset purchases, or a combination of both where one company directly buys the assets or shares of another. The purpose of an acquisition is usually to grow or strengthen the purchasing company by gaining new markets, resources, or capabilities.
Key Takeaways
- Types of Acquisition refer to the various ways in which a company can be acquired. The three main types include friendly acquisitions, hostile acquisitions, and backflip acquisitions.
- A friendly acquisition is where a target company shows willingness to be acquired and there’s mutual agreement between both companies. Conversely, in a hostile takeover, the acquiring company pursues the acquisition without the consent of the target firm.
- In a backflip acquisition, an interesting scenario unfolds where the acquiring company becomes a subsidiary of the target company or both companies merge to form a new entity. This is usually done to tap into the strengths or assets of the targeted company.
Importance
Types of Acquisition is a crucial finance term because it refers to the different ways a company can be purchased or acquired, which has significant implications for the overall business landscape.
These acquisitions could either be friendly, where the management of the target company supports the acquisition, or hostile, where it’s done against the management’s will.
Furthermore, the acquisition can be done by buying a majority stake in the company’s common equity, or through a merger where the acquiring company merges its operations with the target company.
Such acquisitions can drastically change the market dynamics, affect competitor relationships, potentially result in monopolies, and have broad economic impacts.
Therefore, understanding the types of acquisitions is vital for investors, stakeholders, regulators, and decision-makers in the business arena.
Explanation
Acquisition is a significant financial strategy used by companies aiming to enhance their market scope, profitability, and competitiveness often in instances that call for rapid growth or expansion. Its primary purpose is for one company (the acquiring company) to take ownership of another company (the acquired or target company), used to gain a competitive edge in the marketplace. Through acquisitions, the buying company obtains access to the target company’s assets, such as technologies, infrastructure, customer base and market share, thereby strengthening their overall business prospects.
Types of acquisitions can generally be categorized into horizontal, vertical, and conglomerate. A horizontal acquisition occurs when the acquiring firm takes over another firm that operates in the same industry. This strategic move is typically used to eliminate the competition, improve economies of scale, expand the customer base, or diversify the product offerings.
On the other hand, a vertical acquisition is when a company acquires another firm in its supply chain. This type of acquisition helps secure the supply chain, reduce costs, and control more phases of production. Finally, a conglomerate acquisition involves the merger of firms that operate in entirely different industries.
This strategy is used to diversify the business operations and venture into new domains, which may prove beneficial in mitigating risks associated with a single industry.
Examples of Types of Acquisition
Disney’s Acquisition of 21st Century Fox: This acquisition that happened in 2019 was one of the examples of horizontal acquisition where a company acquires another company which is in the same industry and doing the same kind of business. Disney paid about $
3 billion for Fox’s entertainment assets.
Facebook’s Acquisition of Instagram: One clear example for the platform acquisition is Facebook acquiring Instagram in 2012 for roughly about $1 billion in cash and stock. The acquisition was primarily done because Facebook saw a booming mobile photo sharing platform without any substantial revenue.
Lenovo’s Acquisition of IBM’s Personal Computing Division: This acquisition is categorized under conglomerate acquisition, where a company acquires another company which is completely unrelated to its core business. In 2005, Chinese company Lenovo acquired the personal computing division of IBM to penetrate the lucrative American market.
FAQ: Types of Acquisition
What is acquisition?
An acquisition is a financial transaction in which one company purchases, or acquires, another company. The acquired company usually becomes a part of the acquiring company, and may cease to exist as a separate entity.
What are the types of acquisition?
There are primarily two types of acquisition: friendly and hostile. A friendly acquisition is one where the company being purchased is amenable to the sale, whereas in a hostile acquisition, the acquiring company makes the purchase against the wishes of the target company.
What is the difference between merger and acquisition?
While the terms “merger” and “acquisition” are often used interchangeably, they have slightly different meanings. In a merger, two companies of roughly the same size unite to form a new company. In an acquisition, one company purchases another. The purchased company usually ceases to exist, becoming part of the purchasing company.
What is a friendly acquisition?
In a friendly acquisition, the management of the target company agrees to the acquisition by another company. Both sides negotiate terms that are mutually agreeable and beneficial.
What is a hostile acquisition?
A hostile acquisition is when the acquiring company buys the target company against the wishes of the target company’s management and board of directors. This is typically done by going directly to the company’s shareholders or fighting to replace management in order to get the acquisition approved.
Related Entrepreneurship Terms
- Mergers
- Takeovers
- Buyouts
- Consolidations
- Tender Offers
Sources for More Information
- Investopedia: A website dedicated to providing detailed definitions and explanations on wide variety of finance-related terms and concepts, including types of acquisition.
- CFO: The site provides high-level financial strategy and insight for finance executives, including key insights on mergers and acquisitions.
- Corporate Finance Institute: This website serves as an educational platform that provides comprehensive courses and free resources about corporate finance, including acquisition types.
- Harvard Business Review: Harvard Business Review offers in-depth articles and research on numerous business and finance topics, often including insightful discussions about acquisitions.
