Business acquisitions
Business acquisitions occur when one company takes control of another, typically by obtaining a majority of its equity shares. This process differs from mergers, where two companies combine to form a new entity; in an acquisition, the acquired company ceases to exist as a separate entity, and its assets are absorbed into the acquiring company. Organizations pursue acquisitions for various reasons, primarily to enhance shareholder wealth and increase value. They may also aim to enter new markets, eliminate competition, achieve economies of scale, or diversify risk.
Acquisitions are generally categorized into different types: vertical (involving supply chain entities), horizontal (competitors within the same industry), conglomerate (unrelated industries), and congeneric (closely related fields). Acquisitions can be friendly, where both parties agree to the takeover, or hostile, where management of the target company resists the acquisition. Strategies exist for both parties to navigate these situations, such as poison pills and greenmail defenses. While acquisitions are common in the corporate world, they can lead to both positive outcomes, like enhanced market position, and negative consequences, such as reduced competition and job losses. Understanding these dynamics is essential for anyone interested in the complexities of corporate growth and strategy.
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Business acquisitions
In a business acquisition, one company takes over another company, often by acquiring a majority of its equity shares. In theory, acquiring a company is a different process than merging with it: In a merger, two companies combine to form a new company; in an acquisition, the acquired company ceases to exist, and the other company subsumes the assets of the acquired company into its own. In practice, however, the distinction between mergers and acquisitions is not always so clear, and mergers and acquisitions are often discussed and reported together.
Overview
There are many reasons one company may choose to acquire another, but ideally, the underlying motivation is to increase the value of the acquiring company. In a publicly held company, the most basic reason for a merger is to increase shareholder wealth. Many other factors may also be in play, including the possibility of expanding into new markets or new businesses, eliminating a rival and thus reducing competition, increasing company size to enjoy economies of scale, and diversifying risk.
Business acquisitions (like mergers) can be categorized as vertical, horizontal, conglomerate, or congeneric. In vertical acquisitions, the purchasing company acquires a company in its upstream or downstream supply chain, such as vendors or processors. Horizontal acquisitions involve the purchase of a competitor or similar business in the same industry. Conglomerate acquisitions involve the parent company expanding the sectors in which it conducts business by purchasing a company in an unrelated or loosely related industry. Similarly, congeneric acquisitions also allow businesses to expand to a different industry by acquiring a company in a closely related field that produces products that complement the parent company’s current business model’s products.
If a business acquisition is agreed to by both the acquiring and target companies, it is called a friendly takeover. In this arrangement, the leadership of the company being acquired may feel that its value to shareholders will increase, if it is a publicly held company. If the acquired company is private, the leasers may simply agree to sell it or the two companies may share leadership.
In a hostile takeover, the management of the target company resists being acquired, and the takeover is often accomplished by a tender offer or proxy fight. In a tender offer, the acquiring company publicly informs stockholders of the target company that it will purchase their stock at a fixed price (generally above market value). In a proxy fight, a group of shareholders works together to win a corporate vote, e.g., to replace the existing management, so that the takeover will be more likely to succeed.
As hostile corporate takeovers have become more common, companies have developed a number of strategies to resist them. In the poison pill defense, the target company gives existing shareholders the opportunity to acquire shares at a discount following the takeover. In the Pac-Man defense, the target company attempts to acquire the company trying to take it over. In the crown jewel defense, a target company sells its best assets to a third party, making it less attractive to the acquiring company. In a greenmail defense, the target company buys its stock back at a higher price; however, this practice is less common in the United States because greenmail profits are taxed at 50 percent.
In general, acquisitions are part of the normal operations of the business world. However, even in a successful acquisition, there may be negative as well as positive outcomes. These include the loss to a community of a locally owned business, reduced competition and choice for consumers, staff reductions in one or both companies, and reduced efficiencies due to cultural differences between the two companies.
Bibliography
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