If you have any knowledge about the business world or a vivid reader of the business column, then you must have heard often that one company has merged with another or a company has bought maximum shares in another. These are the processes that happen quite often in the business world and to specify such processes terms like mergers and acquisitions (M&A) are used. But what exactly does the term acquisition mean? And why is it so important to understand? This is exactly what we are going to discuss by giving a brief yet detailed look at the term and its importance in the world of business and finances.
What is an Acquisition?
Acquisition occurs when one company buys the shares of another company in an effort to gain control over that company. In simple terms you can say that acquisition is an act of one company taking over or acquiring another company’s controlling interest. This can be done either by buying assets of that company or buying shares or stocks of the company. If the acquirer purchases more than 50% of the company’s stocks, shares or other assets, they gain the power of making decisions regarding the company without the involvement or permission off the other shareholders.
Acquisitions are often beneficial for the acquiring company in terms of market reach and product breadth. The aim of such acquisitions for the acquirer is to grow fast in business and give the company a much quicker and profitable growth as compared to the normal organic growth. Acquisitions in business are quite common and most of the time are done with the target company’s approval; although they can also happen in spite of its disapproval.
If the acquisition has taken place with the target company’s approval, there is a no-shop clause during the process. This means that the target company will have to sell their shares or assets to the agreed acquirer and they cannot change the acquirer in the middle of the process. Although we more commonly hear acquisitions of large and well-known companies because those are the ones that trend most in the news. However, acquisitions happen more commonly in small to medium sized companies.
Acquisitions are considered to be vessels of corporate growth for a company as they create major growth steps by giving a wider reach in the market and bringing a new customer base for the acquirer. Through one acquisition, the acquiring company can achieve up to three to five years of organic growth in a single step. The wider reach and new customer base brings new potential sources of revenue which will help to increase the company’s profits. Acquisition also brings a new set of products and services to the acquiring company. This overall new lineup with new customers and new products will help to strengthen the company’s existing portfolio and give you more ways to create sales growth.
The success of acquisition will depend on the strength of the acquisition process including valuation, structure and operational integration. A discipline should be built on each stage of the acquisition process in order for the acquisition to go smoothly and be successful. The acquirer has to make sure that every step in the acquisition process is managed efficiently by proper resource planning and creating a multi-disciplinary team. Although the front end of the acquisition process is always financial, the sales and operations are the more important steps. There needs to be a strong inter-departmental coordination and project management for an acquisition to be successful.
It is observed that companies with a more holistic integrative approach to managing usually generate more profits, whereas companies that use a more financial approach seem to overlook the integration and operational processes and hence do not generate much profit.
Why do Companies make acquisitions?
Acquisitions are common in the business world and all types of companies—small, large or medium can undergo acquisitions. There are many reasons as to why a company may seek acquisition. These reasons may include seeking a better market reach, a better economic growth, increased synergy, cost reductions, or new niche offerings. Some other reasons for which a company can seek acquisitions are as follows:
To enter a foreign market In case a company wants to enter the foreign market by extending its operations to a particular country, one of the best ways of doing it is acquiring an existing company in that country. As the target company will already have its personnel, brand name and assets, it will be a lot easier for the acquiring company to find its roots in that country’s market and form a new solid base.
Growth strategy When a company is facing physical or logistic constraints and has drained all its resources, it is better to acquire a new company than to expand its own roots. In this way, the company can make use of the target company’s resources and get new ways to earn revenue and gain profit which was not possible before. Such companies often look for promising young companies to acquire.
To decrease competition It should come as no surprise that the business world is one of the most competitive fields and with more and more startups and new companies finding their foot in the market makes this competition even tougher. That is why most companies look for acquisitions to reduce the excess capacity and to eliminate the competition, so that they could focus on the most productive providers.
To gain new technology Another reason why a company may seek acquisition is to improve its resources by gaining new technology from a firm that has already implemented new technology and is functioning on the same. This saves the acquirer company time and money which will be spent to develop the new technology itself.
All of the above reasons are valid enough for a company to seek acquisition and it has been found that most companies have gained considerable profits and success through such acquisitions.