Acquisition — a procedure of buying most of a company's securities in order to control it. The obtaining firm is a “buying company”, and the acquired firm is a “target company”. Such a process may happen with or without the confirmation of a target company. If this happens with approval, the parties include a no-shop clause in the agreement. This clause refuses a seller to get offers from other buyers.
There are various reasons to acquire the company. First, it is the reduction of overheads and exclusion of unproductive suppliers. Another important reason is the opportunity to gain new technologies because it is much easier to get them from another company than to develop them from ground zero. Often, the acquisition becomes the way to start a foreign business. If a company plans to start the business in another country, it just buys the local firm and then gives it a brand name. Also, the acquisition helps to reduce the competition between different firms. And last but not least reason is to apply acquisition as the growth strategy.
Types of Acquisitions
Acquisitions differ in the procedure of this process and the relationship between the “buying” and “target” company. All these strategies may be useful to get market leadership.
Horizontal Acquisition — an absorption that is aimed at the company of the same niche, capacity, or state. In other words, this is an acquisition of a potential competitor. Usually, companies do it to erase the competition and to enlarge their footprint in the market.
Vertical Acquisition — an absorption that is aimed at the company of a different niche, capacity, or state. There are two types of vertical acquisitions. The first type is called a backward integration: an acquisition during which the wholesaler purchases the unit producing the same commodity. Often, they do it to get the inventory at a medium rate.
The inverse process, where the seller purchases the retail stores, is called forward integration. The main goal of the forward integration is to learn the consumer's habits better and to increase retail sales.
Congeneric Acquisition — an absorption that happens between entities with the same product line and business model. The congeneric acquisition allows the companies to extend a product line and to satisfy the customer’s needs better.
Conglomerate Acquisition — an absorption that happens between entities with a different product line and business model. The conglomerate acquisition helps to diversify the business, enter the new market and find new sources of income.
Difference between Acquisition and merger
These two definitions have one common thing: they both describe the processes of uniting two companies into one. However, they have significant differences.
A merger happens when two firms unite into one joint entity with a new management structure. This process occurs between the equal firms. Then, these companies create a new entity. The merger saves the name of the buying company.
Acquisition happens when a big company consumes the small one. All assets and operations management becomes a part of a new company. Acquisitions require large amounts of cash, but the buyer's power is absolute. Buying company gets more than half of ownership in a target company.
However, today the difference between these terms slowly disappears, and the corporate restrictions start to be named merger and acquisition (M&A).
Difference between Acquisition and takeover
These terms are very. They both describe the procedure of absorption of one entity by the bigger one, but there is one subtle difference. The procedure of acquisition is coordinated and agreed upon between companies. The takeover occurs without the agreement of the acquired firm. Such a process is usually called a hostile takeover.