What is acquisition in business? This is a very important term in the business world.
As such, you’re on the right track to want to know what acquisition is in business.
Fortunately, this article takes a deep dive into this business concept.
What Is Acquisition? – What Is Acquisition in Business
An acquisition is a corporate transaction where one company buys all or most of the shares of another company to gain complete or partial control of the company.
Acquisitions are usually amicable because both companies involved are on-board with the acquisition, and both get to negotiate the terms.
Usually, larger companies acquire small companies.
However, there are instances when smaller companies acquire larger companies.
Companies can decide to acquire a company to get leverage over its market operation and the presence or customer base.
Business acquisition is one of the popular ways for business expansion.
It works as a way of helping the acquiring company to enter new markets while utilizing the operational capabilities and resources of the acquired company.
Business acquisitions are usually coordinated by lawyers or investment banks.
However, an internal team or department can manage the acquisition process in some large companies.
What Acquisition is Not – What Is Acquisition in Business
Acquisitions are closely related to takeovers and mergers
As a result, people often mistake those concepts for acquisition.
However, an acquisition is not a merger or takeover.
Let’s take a look at what differentiates acquisition from merger and takeover.
Merger vs Acquisition – What Is Acquisition in Business
Mergers and acquisitions are closely related and are often abbreviated as M&A.
Although these concepts refer to when two companies are joined together, they are still different legal constructs.
A merger combines two companies to form a new business entity.
Meanwhile, an acquisition is when another company absorbs a company, and a new company is not created.
In a merger, the two companies cease to exist, a new one is formed, and both parties have an ownership share of the new company.
Also, new management structures are created, and other things are altered to fit the new business.
Meanwhile, in an acquisition, the company that absorbs another company becomes the parent company.
It can keep operating the absorbed company as a separate entity while using its operational capabilities and resources.
Or it can decide to make it cease existing as a separate legal entity while utilizing its operational capabilities and resources.
Mergers are often friendlier in comparison with acquisitions.
Takeover vs Acquisition – What Is Acquisition in Business
Acquisition and takeover are often used interchangeably, but these terms are different.
As you know, an acquisition is when a company buys and absorbs another company with its permission.
Takeovers, on the other hand, does this without the permission of the target company.
For clarity, takeovers are a special kind of acquisition that happens when an acquiring company successfully assumes control over another without its consent.
Acquisitions are more friendly than takeovers.
Types of Acquisitions – What Is Acquisition in Business
Companies acquire other companies for different reasons and in different ways.
The following are some of the commonly used acquisition types:
Horizontal Acquisitions
Horizontal acquisitions are a type of acquisition where a company buys and absorbs a company in the same business, sector or industry.
In other words, it is when a company takes over another company that provides similar services or products.
When this happens, the acquiring company eliminates one of its competitors.
So, companies often consider horizontal acquisitions to eliminate their competitors and rapidly gain market share.
This can even result in them having a monopoly.
Some examples of horizontal acquisitions include:
- Verizon Wireless purchased British
- Instagram was purchased in 2012 by Facebook for 1 billion dollars
Congeneric Acquisition –What Is Acquisition in Business
Congeneric acquisitions happen when a company buys a company that provides different services or product from them but have the same customer base.
In other words, both companies distribute their services and products to the same people, but their services and products differ.
In this case, they are not competitors.
However, the acquiring company can use it to its benefit, as it will reach its customer base better.
Moving forward, the acquiring company will provide the two different services or products that their customer base uses.
A good example of congeneric acquisition is when steaming networks acquire smart television manufacturing companies.
Some examples of congeneric acquisition in the real world are:
- Coca-cola bought Glaceau in 2007 for 4.1 billion dollars
- Gillette was bought in 2005 for 57 billion dollars by consumer goods giant Procter & Gamble Co.
Vertical Acquisition
Vertical acquisitions are the most popular type of business acquisition.
In vertical acquisition, companies acquire the supplier or distributor of their products.
A good example of vertical acquisition is when clothing companies acquire textile factories.
The target company can be higher or lower in manufacturing processes.
Companies consider vertical acquisition when they want more control of the supply chain.
This acquisition helps companies become independent of vendors and market trends as they will no longer depend on suppliers to produce their products.
Some real-life examples of vertical acquisition are:
- Whole Foods Market was purchased in 2017 for 13.7 billion dollars by Amazon
- Ikea, a Swedish furniture company, continually buys forests.
Conglomerate Acquisition – What Is Acquisition in Business
Conglomerate acquisitions happen when a company buys another company with different geographies, business models, product lines, and customers.
The two companies often have nothing similar.
Usually, the acquiring company goes for conglomerate acquisition to diversify its risk profile and enter new markets.
An instance is when an electronic company acquires a foam manufacturing company.
This acquisition works to protect the acquiring company from market fluctuations.
When companies have two different businesses or markets, it ensures that they don’t lose all their funds at once.
Some real-life examples of conglomerate acquisitions are:
- Microsoft acquired LinkedIn in 2016 for 26.2 billion dollars
- Berkshire Hathaway acquired Heinz in 2013 for 23.3 billion dollars
Advantages of Acquisitions – What Is Acquisition in Business
As the acquiring company, some of the benefits you will enjoy from acquisitions include:
Increased Market Power
You gain an increased market share rapidly when you acquire a business.
This is especially true when you buy out your competitors.
Acquisitions provide growth that enables you to gain a competitive advantage in your marketplace.
You get to accomplish market synergies from the process.
New Resources and Competencies – What Is Acquisition in Business
Your company can buy other companies to gain resources and competencies you don’t currently hold.
Ultimately, this provides several benefits, like rapid revenue growth or improved financial status.
Both of these things help make raising capital for your growth strategies easier.
Diversity and expansion that you will get from acquisitions will also contribute to keeping your company from falling into an economic crash.
Reduced Entry Obstacles
Acquisitions can help you to enter new markets or product lines with an already recognized brand, good reputation, and an existing customer base.
You will overcome the challenges you would have faced as a company venturing into new product lines or markets without experience.
You would spend less as you won’t essentially need to conduct market research or make new product development.
Also, you won’t need time to build a substantial customer base, as the acquired company will already have it.
Access to More Capital – What Is Acquisition in Business
Small business owners are often forced to invest their money for their business growth.
This is because they are unable to access big loan funds.
Nonetheless, an acquisition can expose small business owners to greater chances of accessing big loan funds.
Access to Specialists
If your company lacks specialized experts in some department, acquisition can help you assess that too.
However, this can only work out if you acquire a larger business with specialists.
You can keep utilizing them in your business or choose not to.
Fresh Perspective and Ideas – What Is Acquisition in Business
Acquisitions can help you to get new ideas and fresh perspectives.
This is because you will likely get access to experts who are specialized and passionate.
Passionate people often have fresh ideas and perspectives that will help your business.
So, when you make up your team of these experts, you will get a set of new ideas and different perspectives from them.
Challenges of Acquisitions – What Is Acquisition in Business
Acquisitions can serve as a great way of expanding your business and increasing your profits and revenue.
However, it also comes with its hitches and challenges.
So, you need to consider these downfalls before going on with an acquisition.
Duplication
An acquisition can result in having employees duplicate the duties of others.
This is especially true when the company you acquire has the same business as your company.
There might be situations where two employees or departments perform the same duties.
When this happens, it can lead to excessive funds spent on wages.
Therefore, you need to reorganize and cut out some jobs to ensure efficiency.
However, you need to know that cutting jobs can reduce employee morale and result in low productivity.
Badly matched business
There are times when the absorption of the acquired company can lead to the failure of the acquiring company.
This could be because the target companies possess certain qualities that will not help the acquiring business grow.
So, regardless of the type of acquisition you plan on, ensure you thoroughly check the company you want to acquire.
Make evaluations and analyses to determine if acquiring a company will be a good investment.
This will save you from losing money.
Steps for Acquisition Process – What Is Acquisition in Business
Acquiring a business is not a walk in the park.
It involves several necessary steps.
So, when you want to acquire a business, you need to understand and remember that obtaining a business takes effort.
With that in mind, you can proceed to do the following:
Establish the Acquisition Purpose
Before you start an acquisition, you need to understand why you are doing it.
What is that driving force moving you to purchase a company?
When you ask yourself this question, do not go with the answer which is often given “ I want to expand or grow my business.”
Rather, take time to understand the main specific reason.
For example, you can decide to specifically acquire a company for its efficiency, scale, leverage, diversification, scope, or transformation.
Get to know what explicitly drives you to acquire a company.
When you know what the acquisition is for, then your vision will be clear.
It will also help you avoid acquiring a company that doesn’t provide you with what you want.
Create Your Search Criteria – What Is Acquisition in Business
This is the physical aspect of establishing the acquisition purpose.
First, you think about your purpose, and now you are to take action to help you get a company that provides what you want.
So, you are to create a list of criteria that your target company should have.
Know what you want from a target company and how much you are ready to pay to possess what they have.
Ensure that you are not flexible with what you want.
Instead, do your best to be very specific, as it will help you to get what you want.
Furthermore, be precise about the money you would spend to get business and consider it alongside your business’s financial status.
If you cannot afford a company, do not acquire it.
Research
There are online databases where businesses are put up for sale by business owners or their bankers.
You can go through them and find the most suitable one.
One business can be suitable for a company but not for your business.
This is because target company suitability depends on the acquiring company’s location or size.
However, you can sign up to acquire different businesses on the databases.
This will help you widen your net while giving you a better chance of finding the right company.
Also, on that database, you get exposed to the different prices of businesses and improve your knowledge of business acquisition.
Reach Out To the Company – What Is Acquisition in Business
If you decide to contact the business you found on an acquisition database, you would need to speak to the company’s banker first.
The banker will represent the company.
You have to show interest in purchasing the business before you get the company’s confidential details.
If the standard process is followed, you will have to sign a non-disclosure agreement before you will be given the detailed business memorandum and previous financial performance.
Intro Meetings
Aside from contacting the company, you need an introduction meeting to meet the target business owner and create a report.
You can use the meeting to find out the culture of the company.
Above all, finding out their reward system, vision, and other things will make it easier to absorb the company into yours.
Make Your Offer – What Is Acquisition in Business
After you know the company and still think they have what you want, you should make your offer.
Your offer should align with your purchase criteria, what the company owner will accept if offered, and market comparables.
No business wants to be lowballed.
So, you shouldn’t overlook considering your target company.
Your valuation should not differ from the company owner’s valuation.
This is because it can be considered an insult and breed contempt that will make them unwilling to make any deal with you in the future.
If the valuation expectations of the target company owner are far from yours, then you should both be truthful about it from the get-go and avoid wasting time.
Due Diligence
If the owners accept your offer, then the process can be moved to the due diligence stage.
Due diligence is the process of investigating and auditing the company to see if purchasing the company will work in the buyer’s favour.
Due diligence generally involves understanding the company’s obligations, like their leases, debts, distribution agreements, employment contracts, etc.
The period you will take to undergo and complete a due diligence process effectively depends on the company’s size.
This process provides you with a final chance to discover the company’s dirty secrets (if there are any).
So, take your time during the process.
Use the time to find ways to know how the business operates better.
This way, when the process is over, you can smoothly and immediately continue its operations as yours.
Closing – What Is Acquisition in Business
You will need the assistance of a lawyer to gather the essential documents required to close the deal.
Some of these documents are:
- Legal opinions
- Binding offer
- Regulatory approvals
- Third-party consents evidence
- Ancillary agreements
Work closely with your lawyer to ensure you get all the necessary documents to avoid issues later.
Conclusion on What Is Acquisition in Business
Acquiring a business is an excellent strategy for expanding your business.
However, before considering an acquisition, you need to know everything about it.
This article has done justice to this by providing all the essential information on acquisition in business.
So, make good use of it.
