What Does Acquisition Mean?

Mergers and acquisitions (M&A)

Nowadays, the combination ‘mergers and acquisitions’ (M&A) is slowly but surely replacing the individual terms acquisition and merger and has become a general term to describe any kind of activity to combine businesses or companies.

This developing trend can be ascribed to various reasons, such as:

• A true merger as a “combination of equal partners’ is hugely unusual. In reality, one business is usually more valuable, financially stronger, and larger than the other one.
• Frequently, acquisitions are regarded as takeovers and are therefore viewed in a negative light by the parties involved. Consequently, M&A is used as a more neutral term that is generally favoured by people involved, such as employees, directors, managers, and shareholders.

Although the umbrella term of M&A (mergers and acquisitions) has become a popular term that is regularly used, and while the two terms are also used interchangeably at times, mergers and acquisitions are still slightly different methods to join businesses.

What is a merger?

A merger occurs when two entities combine to form a new legal entity.

A merger can be implemented in the following ways:

• By closing both the old entities and forming a completely new one.
• When one entity absorbs the other one. Put differently, the one entity continues to survive while the other one ceases to exist.

A merger is viewed as a strategy where two entities wish to combine as equals. However, as already mentioned, this objective seldom realises in reality, mainly due to inequalities between the two entities involved.

Generally, a key difference between a merger and an acquisition is the perceptions about them. The term acquisition can be negatively perceived by the company that is integrated into the other company, while a merger is usually perceived as a more positive action.

What is an acquisition?

Simply put, an acquisition takes place when one company acquires control of another company, either via purchasing its shares or its assets.

The purchase can be done with cash, the offering of shares, or a combination of the two.

An acquisition is also referred to as a takeover or a business acquisition.

Acquisitions can take a long time to negotiate and finalise. A period of 3 to 6 months is not uncommon. In complicated cases, it can take as long as a year and longer.

Features of an acquisition are, among others:

• To gain control of another company, one company buys all of most of another company’s (target company) shares. Buying more than 50% of the target company’s shares enables the acquirer to make and execute decisions about the acquired company’s assets, operations, and policies without the consent of the company’s shareholders.
• The acquiring company obtains all the management decisions, regarding, inter alia, finances and operations, of the acquired company. Put in other words, the buying company’s control is complete, and the acquired company no longer functions as an independent identity.
• Both companies continue to exist as separate legal entities. The acquiring company becomes the parent company (sometimes also referred to as the holding company) of the acquired company. Express differently, the acquired company becomes the subsidiary company of the acquiring company.
• The purchasing company may have the right to use the trademarks and brand name of the acquired company.

Types of acquisition

There are two types of acquisition: hostile and friendly.

Hostile acquisitions

Hostile acquisitions, also known as unfriendly acquisitions or hostile takeovers, occur when the target company does not approve the acquisition. To gain control, the acquiring company purchases a majority amount of the target’s company shares in order to obtain a controlling interest – as mentioned, contrary to the opinion of the shareholders.

Friendly acquisition

A friendly acquisition is when both companies agree with the terms, conditions, and legal requirements of the takeover.

Reasons for acquisitions

Reasons, why companies implement acquisitions, are numerous. One of the key reasons for an acquisition is that it is implemented as a strategy for growth.

Acquisition has become one of the most favoured methods for a company to expand its growth potential. Put simply, there is practically one way to accomplish tremendous growth within a short space of time, and that is via purchasing a company of others.

Typically, a target company has something, such as specific resources or processes, that the purchasing company wants but is unable to obtain or to develop them. An acquiring company might look for young and upcoming companies that have the resources, skills, and processes that will enable the company to grow and expand considerably.

Other reasons for acquisitions are, among others:

• Entrance to foreign markets.
• Obtaining new promising technologies.
• To increase market share.
• Minimise or eliminating competition.
• Reducing overheads and costs.
• To utilize well-developed distribution channels.
• To gain access to valuable intellectual property, such as trademarks, brand names, and patents.
• Benefiting from new experts and specialists with valuable skills, knowledge, and fresh perspectives and ideas.

Assessing possible target companies for acquisition

Before undertaking an acquisition, it is crucial for a company to evaluate whether a possible target company is an acceptable prospect.

The assessment has to be executed with due diligence, examining and questioning aspects such as:

• The right price – Is the price a true reflection of the company’s intrinsic value?
• Legal issues – Are there any pending lawsuits, and, if any, what are the scope and nature of them?
• Labour issues – Are there any current disputes with labour unions? Are the contracts, and tax and pension payments regarding employees up to date?
• The financials – Questions that should be asked and aspects that should be scrutinised are, inter alia:
• Are the financial statements audited, and, if so, for which financial years?
• The financial health of the company can be examined by utilizing applicable financial ratios and compare them to other companies in the same industry.
• What does the company’s debt leverage look like? An unusually high level of debt is for sure a warning sign of potential problems in the future.
• What is the condition of the assets? Are there any existing liens?

Risks pertaining to acquisitions

When considering an acquisition, considerable judgement is demanded by a company to address the potential risks. Some of the most common risks of acquisitions include:

• Company cultures clash – Managers and employees from both companies may not integrate as well as expected. This may lead to antagonism, distrust, and a lack of motivation.
• Assets not as valuable as originally thought.
• Conflicting objectives – The two companies may have different objectives. For instance, the acquiring company may want to expand the business, but the acquired company may want to reduce costs.
• Key personnel are unwilling to join a new company.
• Duplication of employees’ duties – The combination of two similar companies may lead to situations where two or more employees perform the same activities, causing unnecessary wages expenses.