Acquisition – Definition, Types, and Examples

What is an Acquisition?

An acquisition is a transaction in which one company purchases a majority or all of another company’s shares in order to take control of it.

Acquisitions are common in business and can occur with or without the target company’s consent. There is often a no-shop clause in the approval process.

Most people hear about acquisitions involving well-known large corporations, but mergers and acquisitions (M&A) occur far more frequently among small and mid-sized companies than large ones.

Key Points about Acquisitions

• An acquisition is a business combination that occurs when one company purchases a majority or all of another company’s shares.
• A company effectively gains control if it purchases more than 50% of the target company’s shares.
• Acquisitions are often friendly, but takeovers can be hostile. A merger creates an entirely new entity from two separate companies.
• Acquisitions are usually executed with the help of an investment bank because they are complex deals with legal and tax implications.
• Acquisitions are closely related to mergers and takeovers.

Understanding Acquisitions

An acquisition is a financial transaction that occurs when a business purchases a majority or all of the shares of a target company. The goal is to control the target’s operations, including assets, production facilities, resources, market share, customer base, and other factors.

Companies acquire other businesses for a variety of reasons:

• economies of scale
• diversification
• greater market share
• enhanced synergies
• cost reduction
• access to new products
• or simply to eliminate competition

Acquisitions are often friendly, occurring when the target company agrees to be acquired and its board of directors approves the deal. Friendly acquisitions are generally aimed at benefiting both the acquiring and target companies. Both sides work on strategies to ensure the acquirer purchases the right assets while reviewing financial statements and other evaluations to identify any obligations tied to those assets. The deal proceeds once both sides agree to the terms and meet legal requirements.

Owning more than 50% of a target’s shares and other assets allows the acquirer to make decisions about the newly acquired assets without requiring approval from other shareholders.

Special Considerations in Acquisitions

Before proceeding, an acquiring company must evaluate whether the target is a good candidate. Key steps include:

• Valuation: Is the price reasonable? Valuation metrics vary by industry, and acquisitions can fail if the asking price is too high relative to benchmarks.
• Debt Load: A target with unusually high debt should raise red flags. The target may even require the acquirer’s directors to sign resolutions confirming liquidity.
• Excessive Litigation: While lawsuits are common in business, a good acquisition candidate should not face litigation levels that are unusually high for its size or industry.
• Financial Health: A strong target has well-structured, transparent financial statements. This facilitates smooth due diligence and helps avoid unpleasant surprises post-acquisition.

Reasons for Acquisitions

• Market Entry (including foreign markets): Buying a company in another country can be the easiest way to enter a foreign market, as the acquired business already has staff, brand recognition, and intangible assets, offering a solid foundation.
• Growth Strategy: Acquisitions can help overcome physical or logistical limitations. Rather than expanding organically, acquiring a younger or promising company can be a faster route to profit growth.
• Reducing Overcapacity & Competition: Acquisitions may be used to cut overcapacity, eliminate competition, and consolidate with the most efficient suppliers. Regulators monitor such deals closely, as they may harm consumers through higher prices and lower quality.
• Access to New Technology: Buying a company that has already developed and deployed new technology may be more cost-efficient than developing it internally.

Company executives have a fiduciary duty to conduct thorough due diligence before any acquisition.

Acquisition vs. Takeover vs. Merger

While acquisitions and takeovers are similar, they have different connotations on Wall Street:

• Acquisition: Generally refers to a friendly transaction where both companies cooperate.
• Takeover: Implies that the target resists or strongly opposes the deal, often described as hostile.
• Merger: Refers to two companies combining to create an entirely new entity.

In practice, these terms often overlap, as every deal has its own unique circumstances and rationale.

Hostile acquisitions are often called takeovers. They occur when the target company does not agree to the acquisition. The acquirer must aggressively purchase a controlling stake in the target, effectively forcing the deal.

A merger occurs when two companies combine into a new legal entity, often in a friendlier manner. These deals typically happen between companies similar in size, customer base, and operations. The belief is that the combined entity will be more valuable to all stakeholders—particularly shareholders—than the companies were separately.

Example of an Acquisition

• AOL, founded in 1985, became the largest internet provider in the U.S. by 2000.
• Time Warner, a legendary media giant, had strong businesses in publishing, television, and other media.

In 2000, AOL acquired Time Warner for $165 billion, the largest merger in history at the time. The vision was to create a dominant force in news, publishing, entertainment, cable, and the internet.

However, the merger’s promise was short-lived. The dot-com bubble burst, AOL lost value, and the expected synergies never materialized. The companies eventually split in 2009.

• Time Warner operated independently from 2009 to 2016.
• Verizon acquired AOL for $4.4 billion in 2015.
• AT&T announced in 2016 that it would acquire Time Warner for $85.4 billion, completing the deal in 2018 after a long legal battle.

The 2018 AT&T-Time Warner deal was historically significant, echoing AOL-Time Warner in scale and controversy. While the U.S. Department of Justice attempted to block it on antitrust grounds, the acquisition was ultimately approved. AT&T later chose to spin off its media assets, including Time Warner.

Types of Acquisitions

Business combinations such as acquisitions and mergers typically fall into one of four categories:

1. Vertical Acquisition: Acquiring a company within the supply chain (upstream supplier or downstream distributor/retailer).
2. Horizontal Acquisition: Acquiring a competitor in the same industry and at the same stage in the supply chain.
3. Conglomerate Acquisition: Acquiring a company in an entirely different industry, unrelated to the acquirer’s core business.
4. Concentric/Market-Extension Acquisition: Acquiring a company in a similar or related industry but with different products or services.

Purpose of Acquisitions

Acquisitions serve various purposes:

• Expanding product or service lines
• Reducing costs through supply chain integration
• Maintaining market share by eliminating competition

Difference Between a Merger and an Acquisition

• Acquisition: The parent company fully takes over the target and integrates it into the parent.
• Merger: The two companies combine to form an entirely new entity, often with a new corporate name and brand identity.

Conclusion

Financial transactions can range from simple buy-sell arrangements to complex acquisitions in which one company purchases most or all of another company’s shares to assume control. Motivations for acquisitions may include entering new markets, expanding market share, or eliminating competition. While large-scale acquisitions make headlines, such deals are also common in the small- and medium-sized business market.