What is Acquisition? Meaning, Types, Advantages and Disadvantages

Table of Content:-

    1. Acquisition Meaning
    2. What is acquisition?
    3. Types of Acquisition
    4. Advantages of Acquisition
    5. Disadvantages of Acquisition

Acquisition Meaning

The acquisition is acquiring or purchasing an existing venture. It is one of the methods of expanding a business by entering new markets or new product areas. A businessman must carefully structure the payment to avoid becoming financially overburdened. He must create scope for phase-wise costs so the company generates funds to pay.

An acquisition strategy is developed based on the assumption that companies for potential acquisition will be available. However, if the choice of companies is limited, the decision may be made out of expediency rather than suitability.

The belief that acquisitions will be a time-saving alternative to waiting for organic growth to materialize may not necessarily hold in practice. Searching for and evaluating potential takeover targets involves engaging in lengthy negotiations. It can be an extremely time-consuming process to integrate an acquired company into the existing organizational structure.

What is acquisition?

The acquisition is a strategic move that concerns establishing the dominance of one company over another company. In this process, A larger company acquires the shares and assets of a smaller company. Thereafter it subsequently operates under the name or joint name of the larger company. It enables the companies to increase their market presence, by enhancing their capabilities and taking advantage of the synergies between the two entities.

An acquisition is a business transaction in which one company acquires a controlling interest in another company. The purpose of this process is to establish the acquired company as a subsidiary business or merge it with its existing operations. This approach allows the acquiring company to expand its market presence, diversify its offerings, or gain a competitive advantage in the business environment.

It is important to understand that for some companies, it is a “one-time only” event. For example, a firm employing a differentiation business-level strategy might decide to acquire only one other company, as it possesses highly specialized skills that the local firm requires to create unique value for its customers.

However, it is uncommon for a company to complete only a single acquisition. The majority of firms engaged in this process form an acquisition strategy, which serves as a well-thought-out plan to successfully procure other companies. An effective and well-executed acquisition strategy helps foster the required growth for the firm.

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Advantages of Acquisition

For the growth and development of the firm acquisitions have been found fruitful, some of the major advantages that a firm can gain from acquisition are given as follows:

Advantages of Acquisition

1) Assets Acquisition

When acquiring a business the buyer has the advantage of selecting the specific assets to acquire, such as liquid assets, real estate, or intellectual property. The buyer has the flexibility to determine which liabilities it can assume, including leases, bank loans, mezzanine loans, and more.

2) Gain Experience and Assets

One of the benefits of an acquisition is the ability for a company to gain the goodwill, experience and assets of the other business. If the acquired business can complement the existing operations of the company, the merger can improve overall efficiency. With the increase in staff and assets, the company can increase output and enhance profitability.

3) Excite the Shareholders

An acquisition can breed excitement among the shareholders. When shareholders of a public company hear of an acquisition, they generally hold a positive outlook they generally hold a positive perspective regarding the value of both their own company and the one being acquired. Taking steps toward an acquisition often results in a surge in both the stock price and the equity of one’s investments.

4) Combining Organisation Cultures

One of the most important advantages of acquisition is the integration of cultures from two distinct organizations. This process enhances the professional environment and also fosters a more cohesive and unified entity.

5) Reducing Costs and Overheads

A company can reduce its costs and overheads by leveraging shared marketing budgets, harnessing increased purchasing power, and capitalizing on lower costs.

Read More: Types of Merger

6) Accessing Funds or Assets for New Development

Better production or distribution facilities are often a more cost-effective option compared to constructing them from scratch. Organisations should look for target businesses that are moderately profitable and have large unused capacity, which can be purchased at a slight premium to their net asset value.

Types of Acquisitions

There are four main types of acquisitions or takeovers, which are explained below:

1) Amalgamations

In this type of acquisition, the involved companies voluntarily go into liquidation to form a new company that takes over their combined assets and liabilities. For example: Let’s say Company A and Company B decide to dissolve and create a new entity called Company C, which takes ownership over the A and B company’s net assets.

2) Acquisitions/Takeovers

This type occurs when one company acquires the total or controlling interest of another company. The acquired company subsequently operates as a separate division or subsidiary under the control of the acquiring company. However, the acquired company continues to exist, but it is under the full control of the acquiring company.

3) Sale of Assets

In the realm of business, a company has the option to dissolve itself by selling its assets to another company. For example, Let’s say, there are two companies P and Q. Company P effectively undergoes an acquisition process by selling its assets to Company Q, ultimately leading to the cessation of Company P’s existence.

4) Holding Company Acquisition

This is a form of merger known as a quasi-merger. By applying this approach companies can strategically expand their influence and strengthen their market position. This method allows for the integration of resources, expertise, and market access, resulting in improved operational efficiency and profitability. In this process, a company acquires either the entirety or a majority portion of another firm’s share capital or stock. The primary objective of this approach is to gain complete control and effectively manage the acquired entity. For example: When A company purchases 69.68% or more of the equity capital in B, Company B becomes a subsidiary of Company A. In this approach, Company B does not go into liquidation instead its management and control are seamlessly transferred to Company A.

Disadvantages of Acquisitions

Acquisitions have been found beneficial for the growth and development of the firm but acquisitions have some major disadvantages also, these are described as follows:

1) Cost

Purchasing a larger company is expensive. The company may not have the necessary funds to acquire the second firm. Even if it does have enough cash, it will be unable to allocate these funds towards other projects. If the company has to borrow money to acquire another firm, this increases the company’s total debt burden. The company can also issue stock to finance the purchase, although the current stockholders will lose some control and ownership rights.

2) Employee Retention

During an acquisition, the company will have employees at both firms performing similar jobs once the purchase has been finalized. In the case of a buyout, it is common for an organization to dismiss employees skilled in performing similar tasks that are unnecessary to the organization. This strategic decision aims to streamline operations and optimise workforce efficiency following the acquisition. Due to employee fears of future layoffs, some employees may begin looking for other jobs or resign from their positions after the company announces its acquisition plan.

3) Productivity

Combining two firms depends on the culture of each firm. A company that has a hierarchical and authoritarian structure may acquire a more flexible organization which is much more flexible and allows workers greater control over their job tasks. Employees may experience dissatisfaction with the new management. If the purchaser makes many changes to existing workplace policies, it may lead to a decline in productivity.

4) Letter of Intent

The acquisition letter of intent is very important in any acquisition process. Acquisition letters of intent often include a confidentiality agreement, because the buyer can otherwise cancel the purchase and use the seller’s trade secrets to compete against it. If the letter of intent is poorly drafted it can potentially leave the buyer vulnerable to exploitation by the seller.

5) Value

Valuation of the combination is important. The seller’s assets include intangible assets such as brand strength and goodwill, which the buyer compensates for as a component of the purchase price. The process of business acquisition itself can adversely impact some of these assets. If an oil company which is accountable for a major oil spill, purchases a solar panel manufacturer, the positive reputation and goodwill of the solar firm may become impaired because of the buyer’s negative reputation.

6) Duplication

An acquisition can lead to unnecessary duplication. When two similar companies merge, many of the positions held in one business will be integrated into the other. This situation often results in duplication of efforts, with two employees or departments performing the same work.

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