Business Acquisition: Definition, Types, Key Players
By Vladana Donevski
June 19, 2023
If you’re like most small-business owners, you’ve probably heard the term “mergers and acquisitions” or the abbreviation “M&A” but don’t know exactly what it means.
In this comprehensive guide, we’ll break down everything you need to know about company acquisitions. We’ll start with an acquisition definition in business, then move on to the various types of these transactions and how to value a company. Finally, we’ll discuss the key players in mergers and acquisitions.
By the end of this guide, you’ll be able to understand what M&As are and why they occur in the business world.
What Is an Acquisition in Business?
A business acquisition, by definition, occurs when one company purchases another company. The purchased company is known as the target, while the purchasing company is known as the acquirer or acquiring company.
The main reason companies engage in a business acquisition is to grow their business further or neutralize competition.
Acquisition, Takeover, or Merger: What’s the Difference?
These terms are often used interchangeably, creating a fair share of confusion around the process. However, there are some key distinctions among them.
An acquisition in business, by definition, occurs when one company purchases another company, and key employees, assets, and management of the acquired company typically become part of the acquiring company.
A takeover typically occurs in the same manner – a company purchases all or the controlling block of shares of another company. While it’s a synonym for acquisition, this term is often used in media to signify that the purchase was made in a hostile manner.
A merger deal is relatively rare. It occurs when two companies merge to form a new legal entity. For the term to apply, all the aspects of the deal – including which company’s management will be in charge, the changes in the value of both company’s stock, and the distribution of seats on the new board of directors – should reflect the fact that the two companies are true equals.
For example, if one company’s stock value is rising and the other company’s stock is losing value after the deal has been announced, it’s likely that the company whose shares drop in value is, in fact, the acquirer.
What Types of Acquisitions Are There?
There are many forms an acquisition may take, but they can generally be classified into two broad categories: friendly and hostile.
Friendly Acquisition
A friendly acquisition is one in which the target company agrees to be acquired by the acquiring firm. In most cases, the management of the target company will work with the acquirer to make the transition process as smooth as possible. That’s why, once the target firm agrees on the deal, the acquisition is typically completed without any major complications.
Hostile Acquisition
A hostile acquisition, also known as a hostile takeover, is one of the examples of acquisition in which the acquired company doesn’t want to be acquired by the acquirer. In a hostile acquisition, the acquirer will attempt to purchase the target company without the approval of its management.
Typically, a larger company does this by purchasing a controlling block of a smaller company’s shares and therefore earns a controlling stake in the business.
This can often lead to a lengthy and complex battle between the two companies, as each tries to convince shareholders to support its position. Through the acquisition of stock, the acquiring company aims to limit the target company’s decision-making. Usually done by companies within the same industry, this has often been a key aspect of large companies’ growth strategy.
Who Are the Key Players in an Acquisition?
There are many players involved in the acquisition of companies. The most important are the target company, the acquirer, and the investment bankers.
The target company is the company that is being acquired by the acquirer. The target company’s management will typically be heavily involved in negotiating the terms of the deal and ensuring that it is in the best interests of shareholders.
The acquirer is the company that is purchasing the target company. The acquirer’s management will typically be responsible for negotiating the terms of the deal and conducting due diligence on the target.
Investment bankers are the financial advisers to both the target and the acquirer in the process of acquisition in business. They will typically be responsible for helping to negotiate the terms of the deal and providing advice on financial matters.
Acquisition deals are often reached after a complex and lengthy negotiation process. However, with the help of an experienced team of advisers, they can be completed successfully.
Why Do Companies Acquire Other Businesses?
There are many reasons for an acquisition. Most of them boil down to improving one’s business, sales, processes, or supply chain.
To Maintain or Establish Monopoly on the Market
An acquisition can be a way for a company to consolidate its position in an industry. For example, if there are only a few companies that manufacture a particular product, it might make sense for one of those companies to acquire the others to increase its market share.
On the same note, acquisitions can also be motivated by a desire to reduce competition. For example, if two companies are competing for the same customers, one of them might decide that it would be more profitable to acquire the other and thus eliminate the competition. This is an example of an acquisition you’ll most likely hear about in the news.
To Upgrade Current Processes and Obtain New Technology
Another reason for company acquisitions is to obtain access to new technology, patents, or other assets that would be difficult or impossible to replicate.
For example, starting a new supply chain or expanding into a foreign market might prove to be much more expensive for a parent company than purchasing a target firm that has its own supply chain.
It Can Be a Good Investment
In some cases, a company might decide to acquire another business simply because it’s a good investment. For example, if a company has excess cash and believes that another company is currently undervalued by the market, it might decide to purchase the target to make a profit when reselling it. Sometimes, companies will resell a company as a whole, other times, they may sell it in parts.
How To Value a Company for a Potential Acquisition
To complete a business acquisition, the acquirer must first identify a target company. Once acquisition candidates have been identified, the acquirer will typically conduct due diligence to assess the value of the target companies and determine whether or not one of them is a good fit for the acquiring company.
To value a company for a potential acquisition, the acquirer will typically conduct a financial analysis of the target designated for business acquisition, meaning: a review of the target’s financial statements, assets and liabilities, and an assessment of its competitive position and future prospects.
Further Reading
- Selling a Business: A Checklist of the Crucial Factors You’ll Need To Consider
- Top 30 Small-Town Business Ideas for Success
- How To Own a Franchise: Simple Guide
Wrapping Up
Acquisitions can be complex processes involving business intelligence. If you’ve been thinking about acquiring a business or selling your company but don’t know where to start, take some time to explore the various types of deals available and how they might fit into your situation.