Understanding Acquisitions
An acquisition refers to the process in which one company purchases a majority or all of another company’s shares to gain control over its operations.
When a buyer acquires over 50% of a company’s shares, they obtain the authority to make key decisions related to the acquired company.
How Do Acquisitions Work?
Companies engage in acquisitions for various reasons, including achieving economies of scale, gaining a significant market share, diversification, cost reduction, or expanding their service offerings.
Acquisitions are often utilized as a means to enter foreign markets.
Acquiring an established firm in a foreign country makes sense as it allows the buyer to leverage the target company’s existing brand recognition and establish a solid foundation.
Additionally, acquisitions are commonly pursued as part of a growth strategy, where a larger company acquires a smaller one to broaden its revenue streams.
Reducing competition and acquiring new technologies are also motivating factors behind acquisitions.
In some cases, it may be more cost-effective to acquire a company with the desired technology rather than developing it internally.
Before an acquisition, thorough due diligence is conducted by the acquiring company to evaluate the target company’s suitability.
Company acquisitions.
Amicability of Acquisitions
Acquisitions can be amicable transactions where both companies work together toward a successful integration.
However, when cooperation is lacking, a takeover may occur where the target company resists the acquisition.
Alternatively, an amalgamation can occur, wherein the two companies merge to form a new entity.
In practice, these terms often overlap and depend on the specific circumstances.
Evaluating Companies for Acquisition
Before an acquisition, the acquiring company must assess whether the target company is a suitable candidate.
This evaluation aims to determine if the proposed price is reasonable, with industry-specific metrics being utilized.
Acquisitions often fail when the asking price of the target company exceeds the established metrics.
Factors such as the target company’s debt load are carefully examined, as high liabilities can signal potential issues.
Legal considerations are also important.
While lawsuits are common in business, excessive legal disputes may raise concerns regarding the target company’s viability as an acquisition candidate.
Furthermore, a thorough evaluation of the target company’s financials is essential.
Well-organized financial records facilitate due diligence and help prevent surprises once the acquisition is completed.