If you’re an entrepreneur or company owner – or even if you just enjoy following the business news – you’ve probably heard about various big-name business acquisitions. Think Facebook’s acquisition of Instagram, Oculus VR, or WhatsApp for example.
In fact, business acquisitions happen often – and can take many different forms, from friendly agreements and mergers, to more hostile actions. This guide unpicks all you need to know about types of business acquisition, with an example to illustrate how they may work in practise.
Table of contents
- What is an acquisition?
- Types of acquisitions?
- What are mergers and acquisitions
- Example of acquisition
What is an acquisition?
In simple terms a business acquisition is where one company buys a controlling stake in another, and is therefore able to make decisions about how that company operates. In this case, the company being acquired is usually called the target company.
To acquire the target company, the purchasing firm will typically need to buy more than half of the target company’s stock and assets. At this point, the target company is effectively owned by the parent company, although it doesn’t necessarily need to change its name or structure.
Depending on the situation, acquisitions may be arranged by mutual agreement between the two companies, including their boards of directors and key shareholders. In this case, both companies are likely to see the acquisition as a positive way to move forward.
If the target company is not in agreement, the acquisition may still go ahead, but is likely to be more fraught with difficulties. In this case the purchase is likely to be referred to as a takeover or hostile takeover, and the purchasing firm will need to employ a range of tactics to push through the deal despite the wishes of the target company.
Types of acquisitions
Acquisitions can take a variety of forms – and can also happen for a broad range of reasons. Let’s take a look at a few of them:
A horizontal merger is likely to happen between two companies which are direct competitors. This type of acquisition may also be referred to as a consolidation.
Companies may look at horizontal acquisitions to get economies of scale. By buying out a competitor, they not only remove some pressure from the market, but also can access the target company’s people, facilities, technology and customer base. This can leave the resulting parent company with a more efficient business, with a greater market share.
Vertical acquisitions happen when a company buys another firm in a different part of the supply chain for the products or services they sell. This is again a smart way for companies to achieve efficiency.
An example is the furniture giant IKEA. As IKEA is one of the world’s largest users of commercial wood, the company has acquired forests, to gain greater control over its own supply chain and costs.
Business acquisitions may also happen among seemingly unrelated companies. In this case, you may be looking at a conglomerate acquisition.
In a conglomerate acquisition a buying company seeks to get a controlling stake in a target firm in a different industry, forming a conglomerate. Parent companies may buy multiple smaller businesses in an effort to diversify risk. Acquired companies continue to work independently of each other, but the parent company benefits from reducing exposure, and therefore risk, in any specific market or niche.
If two businesses which perform different, but related functions for the same customer base join forces, this is known as a congeneric acquisition. Examples of this sort of acquisition may include a bank buying a niche financial services company, such as an insurance firm or loan provider. The purchasing company, in this case the bank, can add the product lines and customer base from the target firm to their own, and cross sell their own products, too.
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What are mergers and acquisitions?
As well as acquisitions, you may have also heard the phrase mergers and acquisitions – often shortened to M&A.
M&A is often used as a shorthand for a broad range of business transactions, and can cover everything from a friendly merger of 2 companies, to the most hard fought hostile takeover. Business transactions like these, especially with larger companies, can be tricky to arrange, both legally and practically – and in terms of the necessary negotiation. For that reason, you’ll also come across M&A specialists who are lawyers and negotiators who consult and support these deals.
Types of Mergers & Acquisitions
Let’s take a brief look at the different terms you might come across with mergers and acquisition deals.
Mergers are where 2 companies join to form a new business, usually changing or combining names. This is usually done among companies which are of relatively equal status – unlike acquisitions and takeovers which tend to involve one larger business buying a smaller entity.
In an acquisition, one company buys a controlling stake of a target firm – usually meaning that they purchase over 50% of the stock and assets of the target. This can be done with the agreement of the board of directors of the target firm – or without. In the latter case, this may be referred to as a takeover or even a hostile takeover, as it’s against the wishes of the target firm.
Acquisition of Assets
Acquisition of assets usually takes place when one company is facing bankruptcy. In this case, other companies may bid to acquire the assets of the company – but not the company itself. Once the assets have been sold, the target company is likely to be dissolved as part of the bankruptcy proceedings.
Consolidations can take the form of either a merger or an acquisition, depending on the situation. Horizontal acquisitions may be referred to as consolidations, but there are also situations in which the consolidation is between 2 companies of more or less equivalent size and value, in which case a merger is more likely. In both cases the reason for this business transaction is to increase efficiency and market share.
Under a management acquisition – which can also be called a management led buyout – the executives of a company buy a target firm, often using finance from a third party. In this case the majority of shareholders should approve the deal.
Example of acquisition
To round off, let’s look at an example of how an acquisition may work. It’s good to note that each situation is unique, so you’ll see different techniques employed, and different levels of success when companies decide to merge or grow through acquisition.
In this case, let’s look at one of the tech giants – Facebook – and its acquisition of WhatsApp. Facebook is said to have acquired almost 80 companies since 2015 – although the details of only a handful of these deals have been made public. In many cases these acquisitions have been aimed at acquiring talent, and the products the target companies made ultimately shut down, while the people were assimilated into the existing Facebook staff.
Facebook announced that it had acquired WhatsApp in February 2014, at a cost of USD19 billion. This makes it Facebook’s highest valued acquisition on the public record. At the time of purchase, WhatsApp was still majority owned by its founders.
This acquisition can be considered a horizontal acquisition as both WhatsApp and Facebook operated online messaging services. It therefore made sense for Facebook – the dominant player – to acquire WhatsApp. Facebook bought the technology, the talent, and also brought a new group of customers on board through the purchase.
The vast majority of mergers and acquisitions which take place day to day in the US and around the world could be nothing like the scale of Facebook acquiring WhatsApp. But the benefits – in many cases to both companies involved – are still the same when the interested parties are smaller businesses.
Business transactions like mergers and acquisitions can be complex and confusing. But with this simple guide, you’ve got all the basics of the key concepts to hand should you need them.
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- Assessment and preliminary review.
- Negotiation and letter of intent.
- Due diligence.
- Negotiations and closing.
- Post-closure integration/implementation.