In the world of business and commerce, companies often engage in mergers and acquisitions – gaining most or all of a company’s shares to take full control. Typically, all a company needs is at least 51% of shares in another company to make executive decisions without the need of the approval of the company’s shareholders.
There are numerous reasons why companies choose to do this, and these acquisitions involve a significant number of moving parts. In this article, we will detail the basics of business acquisitions and how they work.
How Do Business Acquisitions Work?
As previously mentioned, business acquisitions have a lot of moving parts. Both companies have to delve deep and look into legal, business, human resources, intellectual property, and financial details.
Most often, business acquisitions are spearheaded by a team who are specialized in business acquisitions. This is because while acquisitions are motivated by business, the proceedings for acquisitions to occur are heavily monitored and sanctioned by the law. For example, Stoneridge Partners is a merger and acquisition advisory company that specializes in healthcare. Acquisitions can take months to happen just to layout the groundwork and get the necessary information for the acquisition to happen.
What is an Acquisition?
When discussing acquisitions, other similar terms are thrown around – particularly, mergers and takeovers. However, there are key differences among the three.
Among the three, a merger stands out as a distinct concept. Essentially, a merger is the conglomeration of two or more companies into one new entity. This is typically a mutual decision between the two companies. Furthermore, the new entity can use the name of the company that would make more sense for them to proceed, or get a new name altogether.
Acquisitions and takeovers are practically the same in the sense that one company purchases the majority of another company in order to gain control. The two terms only differ in the sense that acquisitions are usually agreed upon by both companies while takeovers are more hostile in nature.
Factors for Acquiring a Company
Despite the advantages that acquiring another company can entail, companies need to look into several factors to ensure that the acquisition is beneficial to them.
First, the valuation of the company being acquired has to be fair and appropriate. There are different ways to appraise a company’s worth such as their gross revenue, their current stock price, and more. The price is usually for the acquiring company to set.
The acquiring company also has to ensure that the company they wish to acquire is not in hot water. This could mean many things. For example, companies that are currently under litigation or any other legal case might not be too ideal. Furthermore, the company should also not be burdened by debt too much.
Why do Acquisitions Happen?
There are numerous reasons why acquisitions occur in the business world. Staying competitive is one of the main facets that allow companies to thrive and survive. A quick look around will show that companies that are still operational for a long time have used a wide array of competitive strategies to survive. Surviving in the world of commerce can be as simple as upgrading their tech and being with the times, or they can acquire other companies for certain advantages.
Acquisitions specifically can provide numerous benefits for a company. For example, a company can acquire another company in a different place in the globe as a way to enter the foreign market. Expanding into a foreign market is similar to a fisherman casting a wider net. This is especially advantageous for the acquiring company when they know they are in a position to maximize another company’s potential, but in a different location.
A company can acquire other companies simply as a way to reduce competition. Acquisitions usually occur among companies that operate in the same field. For example, an oil company is more likely to acquire another oil company, and not a tech company. Acquiring other companies in the same field not only reduces the competition of the acquiring company, but also increases the acquiring company’s influence over the market.
Since a key strategy for companies to thrive is to advance themselves with technology, companies can acquire other companies that can help them do just that.
For example, the Walt Disney company back then only had the Walt Disney Studios which focused on 2D animation. Despite their success in the film industry, the Walt Disney Company acquired the Pixar Animation Studios that specialized in computer-animated films.
Having been purchased by the Walt Disney Company back in 2006 at a valuation of $7.4 billion, the company has been estimated to have earned $14 billion as of July 2019 – with each feature film having an average worldwide gross of $680 million.
Using the Walt Disney Company as an example again, acquisitions can help a company reach more customers and clients. While the Walt Disney Company has its own strong following, the company acquired other film production studios that had their own population of fans. Having acquired Marvel back in 2009, and Lucasfilm in 2012, the Walt Disney Company was able to fund more projects for both film studios and acquire the fanbase of each.
What Happens to the Acquired Company?
The fate of the acquired company heavily lies in the hands of the acquiring company. However, with most amicable acquisitions, the company being acquired has already set terms for what the acquisition will mean for them – particularly what happens to its intellectual properties, its staff, and more.
However, when an acquisition is more hostile like in a takeover, the acquiring company is usually just after the assets of another company.
Acquisitions are not uncommon in business. All around, companies are always striving to acquire one another as a way to stay on top. These tactics are especially common in tech companies when they are often headline news such as when Facebook acquired Instagram and WhatsApp or when Google acquired YouTube and Android.