Acquisition

Acquisition Business Strategy Mergers and Acquisitions Corporate Finance Takeover Business Expansion
An acquisition occurs when one company takes over controlling interest in another company. This strategy is often employed to achieve specific business objectives such as expanding market share, gaining new technologies, or reducing competition.
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Definition

An acquisition refers to the process where one company purchases most or all of another company’s shares to gain control over that company. Acquisitions can be friendly, where both companies agree to the terms, or hostile, where the target company does not want to be purchased. This strategic move helps companies grow their market share, diversify their offerings, or achieve other business objectives.

Examples

  1. Facebook and Instagram (2012): Facebook acquired Instagram for approximately $1 billion in cash and stock. This acquisition helped Facebook to expand its footprint in the photo-sharing and social media space.

  2. Amazon and Whole Foods (2017): Amazon acquired Whole Foods for $13.7 billion, enabling it to enter the grocery and high-end food markets, while leveraging Whole Foods’ retail footprint.

Frequently Asked Questions (FAQs)

Q1: What is the difference between an acquisition and a merger?

  • A1: An acquisition involves one company taking over another, while a merger is a blend of two companies into a new entity.

Q2: What are the primary motives behind acquisitions?

  • A2: Motives include expanding market share, gaining new technology or products, removing competition, and achieving economies of scale.

Q3: What is a hostile acquisition?

  • A3: A hostile acquisition occurs when the target company’s board of directors resists the acquisition, and the acquiring company directly approaches the shareholders.

Q4: How do acquisitions affect shareholders?

  • A4: Shareholders of the target company usually receive a premium on their shares, but the overall impact depends on the specifics of the acquisition deal.
  • Merger: A combination of two companies where both entities cease to exist independently to form a new, combined organization.
  • Pooling of Interests: An accounting method used in mergers and acquisitions where the balance sheets of the combining companies are combined.
  • Takeover: Another term for acquisition, where one company gains control over another.

Online References

Suggested Books for Further Studies

  1. “Mergers, Acquisitions, and Other Restructuring Activities” by Donald DePamphilis: This book offers detailed insights into the M&A process, strategies, and financial considerations.
  2. “The Art of M&A Strategy: A Guide to Building Your Company’s Future through Mergers, Acquisitions, and Divestitures” by Kenneth Smith and Alexandra Reed Lajoux: A comprehensive guide to understanding and executing successful M&A strategies.
  3. “Valuation: Measuring and Managing the Value of Companies” by McKinsey & Company Inc.: Provides in-depth knowledge on valuation techniques crucial for acquisition deals.

Fundamentals of Acquisition: Corporate Finance Basics Quiz

### What is an acquisition? - [ ] A joint venture between two companies - [ ] A cooperative agreement between two businesses - [x] One company taking over controlling interest in another company - [ ] A merger of two firms into a new company > **Explanation:** An acquisition occurs when one company takes over controlling interest in another company, thus gaining control of it. ### What is a hostile acquisition? - [x] An acquisition where the target company resists the takeover - [ ] An acquisition where both companies agree to the terms - [ ] An acquisition initiated by the government - [ ] An acquisition with no premium paid on shares > **Explanation:** A hostile acquisition is when the target company's board of directors resists the takeover attempt. The acquiring company then directly approaches the shareholders. ### What is a major benefit of an acquisition? - [ ] Increasing competition in the market - [x] Expanding market share and business capabilities - [ ] Reducing the acquiring company's size - [ ] Eliminating the acquiring company’s brand > **Explanation:** A primary benefit of an acquisition is to expand market share and business capabilities by leveraging the resources and technologies of the acquired company. ### Which of the following is an example of a friendly acquisition? - [ ] A company acquiring another without any negotiation - [x] Facebook's acquisition of Instagram - [ ] An acquisition opposed by the target company’s board - [ ] A government-forced acquisition of a company > **Explanation:** Facebook’s acquisition of Instagram is an example of a friendly acquisition, as both companies agreed to the terms and conditions. ### What is the difference between a merger and an acquisition? - [ ] A merger is hostile, and an acquisition is friendly - [ ] A merger reduces market share, and an acquisition increases it - [ ] A merger involves taking over another company’s debt - [x] A merger combines two companies into a new entity, while an acquisition means one company takes over another > **Explanation:** In a merger, two companies combine to form a new entity, whereas in an acquisition, one company takes over another without forming a new entity. ### Why might a company pursue an acquisition? - [ ] To shrink its business operations - [ ] To reduce its market presence - [x] To gain access to new technologies or markets - [ ] To eliminate its own brand identity > **Explanation:** Companies often pursue acquisitions to gain access to new technologies, markets, or resources that can enhance their capabilities and competitive position. ### What usually happens to the stock price of the acquired company in a friendly acquisition? - [ ] It decreases significantly - [ ] It remains the same - [x] It often increases due to the acquisition premium - [ ] It becomes highly volatile > **Explanation:** In a friendly acquisition, the target company’s stock price often increases because the acquiring company usually pays a premium over the current market value of the shares. ### Which term is closely related to the concept of acquisition? - [ ] Bankruptcy - [x] Takeover - [ ] Joint venture - [ ] Divestiture > **Explanation:** "Takeover" is a term closely related to acquisition, as both involve one company gaining control over another. ### What is pooling of interests? - [x] An accounting method used in mergers and acquisitions - [ ] A strategy for marketing new products - [ ] A way to consolidate debts - [ ] A method to increase employee morale > **Explanation:** Pooling of interests is an accounting method used in mergers and acquisitions to combine the balance sheets and financial statements of the merging companies. ### How do acquisitions affect competition in the market? - [ ] They always increase competition - [ ] They have no effect on market competition - [x] They can potentially reduce competition by consolidating market players - [ ] They ensure equality among all market competitors > **Explanation:** Acquisitions can potentially reduce competition by consolidating players in the market, thereby increasing the market share and influence of the acquiring company.

Thank you for exploring the fundamentals of acquisitions with us. Stay focused on expanding your knowledge base to excel in corporate finance and business strategy!

Wednesday, August 7, 2024
Acquisition Accounting (Purchase Accounting)
Acquired Goodwill
Leveraged Buyout (LBO) January 1, 1
Sleeping Beauty Takeover January 1, 1
Takeover January 1, 1
Built-to-Flip January 1, 1
Bust-Up Acquisition January 1, 1
Buy-Out January 1, 1
Buyout January 1, 1
Corporate Acquisition January 1, 1
Crown Jewels January 1, 1
Defended Takeover Bid January 1, 1

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