An acquisition occurs when one company takes control of, or acquires, another existing company. Show
Definition and Examples of AcquisitionsAn acquisition occurs when one company purchases and takes over the operations and assets of another. NoteThe company that purchases another is called the acquiring company, and the company that is bought is the acquired, or target, company. One example of this is when Amazon acquired Whole Foods in 2017 for approximately $13.7 billion. How Acquisitions WorkAcquisitions can be the amicable result of friendly discussions between two firms in which the target company welcomes the acquisition. In this situation, the two companies negotiate the terms of the acquisition and ultimately reach an agreement. However, acquisitions can also occur against the will of the acquired firm’s management in what is called a “hostile takeover.” In a hostile takeover, an outside firm acquires a controlling interest in the target firm by purchasing more than 50% of the target company’s shares. This is done by offering the existing shareholders a higher price for their shares than what they could currently get on the open market, thereby enticing them to sell. Regardless of whether the acquisition is friendly or hostile, the shares of the acquired firm are normally bought for more than their current market value. The difference between the current market price of a share and the price offered through a takeover is called the “premium.” When Amazon acquired Whole Foods in 2017, it offered $42 per share for Whole Foods, a 27% premium over its current share price. Types of AcquisitionsAn acquisition can be paid for in cash, through a security payment such as a stock-for-stock exchange, a leveraged buyout, or a combination of several of these methods. A company can acquire another by giving cash to the existing shareholders of the target company for their shares. This is the simplest form of payment. In a security payment, the acquiring company will offer new securities in exchange for the securities and assets of the target company. NoteIn a leveraged buyout, the purchasing company borrows a significant amount of the money to complete the transaction, often selling off some of the purchased assets to repay the debt once the deal is complete. Acquisitions vs. MergersThe words “acquisition” and “merger” are often used interchangeably in practice, but the two are technically distinct. In an acquisition, the target company is folded into the acquiring company and ceases to exist. In a merger, two firms combine to form a new company. Merger AcquisitionTwo companies form a larger oneOne company takes over anotherBy agreementBy agreement or hostile Pros and Cons of AcquisitionsAcquisitions are motivated by a desire of the acquiring company to improve financial performance. However, as with any business activity, an acquisition is not without risk. There is no guarantee that an acquisition or merger will improve a company’s bottom line. Pros
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Key Takeaways
Was this page helpful? Thanks for your feedback! Tell us why! Other SubmitSources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. What happens to cash in an acquisition?The cash position of an acquired company will depend on the nature of the transaction that has taken place. If a company buys another legal entity, then the acquirer will gain the ownership of all of the assets and liabilities of the acquired company, and that will include cash.
What is a completed acquisition?Acquisition Completion means the completion of the sale and purchase of the Purchase.
What is cash acquisitions?Cash Acquisition is any acquisition by the Borrower of the assets or capital stock of another entity, the consideration for which consists solely of cash and/or marketable securities.
What are the three types of acquisition?For a high-growth company, acquisitions fundamentally boil down to one of three types: (1) team buy, (2) product buy, or (3) strategic buy. There is actually a fourth type of acquisition companies can make, often called a “synergistic” acquisition.
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