Companies acquire other companies for various reasons. They may seek economies of scale, diversification, greater market share, increased synergy, cost reductions, or new niche offerings. Other reasons for acquisitions include those listed below.
If a company wants to expand its operations to another country, buying an existing company in that country could be the easiest way to enter a foreign market.
The purchased business will already have its own personnel, a brand name, and other intangible assets, which could help to ensure that the acquiring company will start off in a new market with a solid base. Perhaps a company met with physical or logistical constraints or depleted its resources. If a company is encumbered in this way, then it's often sounder to acquire another firm than to expand its own.
Such a company might look for promising young companies to acquire and incorporate into its revenue stream as a new way to profit. If there is too much competition or supply, companies may look to acquisitions to reduce excess capacity, eliminate the competition, and focus on the most productive providers. Sometimes it can be more cost-efficient for a company to purchase another company that already has implemented a new technology successfully than to spend the time and money to develop the new technology itself.
Officers of companies have a fiduciary duty to perform thorough due diligence of target companies before making any acquisition. Although technically, the words "acquisition" and " takeover " mean almost the same thing, they have different nuances on Wall Street. In general, "acquisition" describes a primarily amicable transaction, where both firms cooperate; "takeover" suggests that the target company resists or strongly opposes the purchase; the term " merger " is used when the purchasing and target companies mutually combine to form a completely new entity.
However, because each acquisition, takeover, and merger is a unique case, with its own peculiarities and reasons for undertaking the transaction, use of these terms tends to overlap. Friendly acquisitions occur when the target firm agrees to be acquired; its board of directors B of D, or board approves of the acquisition. Friendly acquisitions often work toward the mutual benefit of the acquiring and target companies.
Both companies develop strategies to ensure that the acquiring company purchases the appropriate assets, and they review the financial statements and other valuations for any obligations that may come with the assets. Once both parties agree to the terms and meet any legal stipulations, the purchase proceeds. Unfriendly acquisitions, commonly known as "hostile takeovers," occur when the target company does not consent to the acquisition. Hostile acquisitions don't have the same agreement from the target firm, and so the acquiring firm must actively purchase large stakes of the target company to gain a controlling interest, which forces the acquisition.
Even if a takeover is not exactly hostile, it implies that the firms are not equal in one or more significant ways. As the mutual fusion of two companies into one new legal entity, a merger is a more-than-friendly acquisition. Mergers generally occur between companies that are roughly equal in terms of their basic characteristics—size, number of customers, the scale of operations, and so on.
So I think the investment you make before you make your deal—in terms of people relationships—is very significant. Be clear and firm about key objectives and procedures, but remain flexible about nonessentials. Communicate these distinctions explicitly to the target company.
Involve few people in analyzing and carrying out the acquisition, but try to involve those who will work with the business later. Researchers and financial analysts usually describe acquisitions as calculated strategic acts. In sharp contrast, people directly involved in the acquisition process often point to powerful forces beyond managerial control that accelerate the speed of the transaction.
Pressure to close a deal quickly can prevent managers from considering strategic and organizational fit issues completely and dispassionately and can lead to premature conclusions. The thrill of the chase blinded pursuers to the consequences of the catch. Various forces increase momentum in the acquisition process. First, decision makers need secrecy and intense concentration. Once the possibility of a deal becomes known in a company, business as usual virtually ceases, and a period of uncertainty sets in for shareholders, employees, suppliers, customers, and competitors.
In such situations, the time given to analyzing data and considering a wide range of options tends to dwindle as people try to consummate the arrangements before news is leaked that could cause disruptions internally or in the financial markets.
The personal and organizational stakes involved in an acquisition are greater and more uncertain than those most managers face in their day-to-day work. As a result, managers involved in the process tend to isolate themselves from other company activities, a reaction that heightens feelings of tension and uncertainty. The strain everyone feels tends to worsen the effects of already intense time pressures, which augments still further the desire to wrap things up.
Second, acquisition analyses and negotiations frequently require a substantial, uninterrupted time commitment from participants. The more managers identify with an acquisition, the less likely that they will be able to consider it objectively and accept criticism that could slow it down.
Feeling that they have put their reputation for sound, decisive judgment on the line by initiating the process, senior executives may hurry to complete the deal, in part to justify their earlier decision to pursue the target. Third, each major player in the acquisition process has distinctive interests that tend to increase momentum to finish things up. These players include senior executives in the acquiring and target companies, staff and operating managers in both organizations, and outside advisers.
For managers in the acquiring company, the target may be a stepping-stone to personal rewards and advancement as well as a device to enhance their own reputations. In many companies, for example, after the board authorizes the CEO to begin an acquisition search, a task force or committee is established. This committee then develops a list of criteria and screens a variety of possibilities, often with the help of an investment banker. This group may think it has failed if it finds no candidate.
Moreover, task force members may see brighter career opportunities for themselves as a result of negotiating an acquisition successfully. Managers can never fully reduce nor should they ever eliminate the uncertainty or opportunities associated with performance and career expectations. But senior executives should recognize the impact this factor has on their companies and ensure that, whenever possible, career opportunities and rewards are based on performance that extends beyond any single acquisition.
For example, an aging electronics company made a series of acquisitions to gain access to new and different technologies. Because some managers viewed these new subsidiaries as the only path for growth in the company, they arranged transfers to the recent acquisitions and took with them important operating people from their old divisions.
Other players whose interests are at stake include outside advisers, especially investment bankers. Because they are compensated on a transaction basis, their fee does not vary dramatically if a deal takes three weeks or nine months to close.
It is in their interest, therefore, to conclude the process quickly—in part because, within investment banks themselves, merger and acquisition activity involves no risk capital. Indeed, merger and acquisition work offers a more certain path to profitability than do traditional corporate finance or security sales and trading aspects of the investment banking business.
This situation may create a serious problem: companies use these outside experts to provide objective, professional advice, yet these advisers face a conflict between representing their own interests and those of their clients. Of course, there are some restraints on increasing momentum to make deals.
Prevailing laws and most corporate bylaws require the board of directors to approve acquisitions. Perhaps board members assume that management has already evaluated these issues adequately. Most companies do not make acquisitions sequentially with several acquisitions coming close together. As a result, few companies have opportunities to learn over time. When a company has experience in integrating acquisitions successfully, this familiarity may serve to slow momentum. Of course, it is not always possible or desirable to slow down the acquisition process.
Once a potential candidate is identified, managers are faced with the very real threat that another company could buy it. Indeed, moving quickly to acquire another company is appropriate in many cases. For example, if a management group sees only one candidate that meets its strategic requirements, or if imminent environmental changes could close off an opportunity, then quick action may be the best choice.
For each acquisition, managers should consider what factors are accelerating the process and distinguish openly between corporate strategy and such factors as the interests of special groups or individual career and ego issues. These considerations are, of course, intertwined in most situations.
But addressing each one separately in a forthright manner can help the participants challenge easy or convenient explanations for making the deal rapidly. After several years, we had indigestion so badly that we wished somebody else had acquired them.
Experienced acquirers we interviewed consistently emphasized that it is better to let a deal go than to let momentum sweep a company into a partnership that it has doubts about. A more concrete set of actions to mitigate momentum involves adjusting the incentives to do the deal that the various parties are experiencing. The CEO and board should address the ways that such motives can escalate pressure to consummate an acquisition.
Because acquiring company managers can exercise the most control over internal rewards, we will focus on those incentives here. These rewards can take many forms. Career enhancements and ego satisfaction are two we have already highlighted.
Another practice that some companies adopt is to appoint key acquisition analysts to top management roles in the newly acquired subsidiary.
These procedures may encourage managers to think about taking the business into new areas, may foster managerial continuity throughout the acquisition process, and may help integrate preacquisition analysis into postacquisition operations. But these methods also reward the pursuit of inappropriate acquistion candidates and can compound the problem of increasing momentum. An alternative that seems to address both sets of problems is the early and prominent involvement of line managers in the acquisition process.
Their experience can help the acquisition team remain focused on potential operating problems that analysts who lack an operating orientation might miss. When CEOs or other managers believe that the outcome of a proposed acquisition could affect their reputations, pressure to consummate the deal builds. It would be naive to recommend that managers simply attempt to maintain a sense of distance and perspective—as though that were easy to do. But one technique that can help is a formal check-and-balance system that keeps those responsible for dispassionate review out of the process.
The CEO or the board can play such a role. It may still be difficult to slow the momentum, even with changes in reward structures. Some companies counter this problem by involving experienced board members and managers in acquisition activities. An experienced team is more likely to identify and probe into potential trouble spots and resist the urge to pursue poor choices.
Our research indicates that the experience most lacking on acquisition teams is not that of staff or consultant specialists but of general managers who have been involved in all phases of an acquisition—including trying to make the partnership work. During the acquisition process, both suitor and target enter into negotiations with certain expectations about the purposes of the acquisition, the benefits they expect, levels of future performance, and the timing of certain actions.
To reduce the potential for disagreement during the negotiations and to facilitate closure, the parties often agree to disagree for the moment and postpone resolution of difficult issues. Richard is the author of several books on startups and entrepreneurship as well as the co-author of Poker for Dummies and a Wall Street Journal-bestselling book on small business.
He can be reached through LinkedIn. David A. He is a member of the Board of Directors of the Giffords Law Center to Prevent Gun Violence and has served on additional educational and charitable boards. Richard V. He has over 35 years of experience in the areas of mergers and acquisitions, securities law, and corporate law. This article was originally published on AllBusiness. This is a BETA experience. You may opt-out by clicking here. More From Forbes. Nov 8, , pm EST.
Sep 28, , am EDT. Aug 30, , am EDT. Aug 18, , pm EDT. Aug 2, , am EDT. Jul 26, , pm EDT. Jul 13, , am EDT. Jun 13, , am EDT. Jun 11, , pm EDT. For simplicity's sake, suppose the value of a company is simply the sum of all its equipment and staffing costs. The acquiring company can literally order the target to sell at that price, or it will create a competitor for the same cost.
Naturally, it takes a long time to assemble good management, acquire property, and purchase the right equipment. This method of establishing a price certainly wouldn't make much sense in a service industry wherein the key assets people and ideas are hard to value and develop.
In general, "acquisition" describes a transaction, wherein one firm absorbs another firm via a takeover. The term "merger" is used when the purchasing and target companies mutually combine to form a completely new entity. Because each combination is a unique case with its own peculiarities and reasons for undertaking the transaction, use of these terms tends to overlap. Two of the key drivers of capitalism are competition and growth. When a company faces competition, it must both cut costs and innovate at the same time.
One solution is to acquire competitors so that they are no longer a threat. Companies may also look for synergies. By combining business activities, overall performance efficiency tends to increase, and across-the-board costs tend to drop as each company leverages off of the other company's strengths. Friendly acquisitions are most common and occur when the target firm agrees to be acquired; its board of directors and shareholders approve of the acquisition, and these combinations often work for the mutual benefit of the acquiring and target companies.
Unfriendly acquisitions, commonly known as hostile takeovers, occur when the target company does not consent to the acquisition. Hostile acquisitions don't have the same agreement from the target firm, and so the acquiring firm must actively purchase large stakes of the target company to gain a controlling interest, which forces the acquisition. Generally speaking, in the days leading up to a merger or acquisition, shareholders of the acquiring firm will see a temporary drop in share value.
At the same time, shares in the target firm typically experience a rise in value. This is often due to the fact that the acquiring firm will need to spend capital to acquire the target firm at a premium to the pre-takeover share prices.
After a merger or acquisition officially takes effect, the stock price usually exceeds the value of each underlying company during its pre-takeover stage. In the absence of unfavorable economic conditions , shareholders of the merged company usually experience favorable long-term performance and dividends.
Note that the shareholders of both companies may experience a dilution of voting power due to the increased number of shares released during the merger process. This phenomenon is prominent in stock-for-stock mergers , when the new company offers its shares in exchange for shares in the target company, at an agreed-upon conversion rate.
Shareholders of the acquiring company experience a marginal loss of voting power, while shareholders of a smaller target company may see a significant erosion of their voting powers in the relatively larger pool of stakeholders.
Horizontal integration and vertical integration are competitive strategies that companies use to consolidate their position among competitors. Horizontal integration is the acquisition of a related business. A company that opts for horizontal integration will take over another company that operates at the same level of the value chain in an industry—for instance when Marriott International, Inc. Vertical integration refers to the process of acquiring business operations within the same production vertical.
A company that opts for vertical integration takes complete control over one or more stages in the production or distribution of a product. Apple, for example, acquired AuthenTec, which makes the touch ID fingerprint sensor technology that goes into its iPhones. Marriott International. Securities and Exchange Commission. Form 8-K. Career Advice.
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