What is an ‘Acquisition’
An acquisition is a corporate action in which a company buys most, if not all, of another firm’s ownership stakes to assume control of it. An acquisition occurs when a buying company obtains more than 50% ownership in a target company. As part of the exchange, the acquiring company often purchases the target company’s stock and other assets, which allows the acquiring company to make decisions regarding the newly acquired assets without the approval of the target company’s shareholders. Acquisitions can be paid for in cash, in the acquiring company’s stock or a combination of both.
BREAKING DOWN ‘Acquisition’
Huge deals dominate the business section of the newspaper, such as Dow Chemical’s purchase of DuPont for for $130 billion in 2015. In any given year, however, far more small to medium-sized businesses merge with and acquire one another than do large companies.
Why Make an Acquisition?
Companies perform acquisitions for various reasons. They may be seeking to achieve economies of scale, greater market share, increased synergy, cost reductions, or new niche offerings. If they wish to expand their operations to another country, buying an existing company may be the only viable way to enter a foreign market, or at least the easiest way: The purchased business will already have its own personnel (both labor and management), a brand name and other intangible assets, ensuring that the acquiring company will start off with a good customer base.
Acquisitions are often made as part of a company’s growth strategy when it is more beneficial to take over an existing firm’s operations than it is to expanding on its own. Large companies eventually find it difficult to keep growing without losing efficiency. Whether because the company is becoming too bureaucratic or it runs into physical or logistical resource constraints, eventually its marginal productivity peaks. To find higher growth and new profits, the large firm may look for promising young companies to acquire and incorporate into its revenue stream.