Definition
An acquisition is a corporate transaction in which one company (the acquirer or acquiring company) purchases a controlling interest in another company (the target or acquired company). This purchase can involve acquiring the target’s assets, stock (shares), or other ownership interests. The primary objective of an acquisition is for the acquirer to gain control of the target company’s operations, assets, and liabilities. Acquisitions are a common strategy for corporate growth, expansion into new markets, gaining new technologies or products, or eliminating competition.
Understanding Acquisitions
Although the terms are often used interchangeably, acquisitions differ from mergers. In a merger, two companies of relatively similar size agree to combine to form a single new entity. In an acquisition, one company takes over another.
Types of Acquisitions
1. Asset Acquisition
In an asset acquisition, the acquiring company purchases specific assets of the target company, such as tangible assets like property, plant, and equipment (PP&E), inventory, and intangible assets like patents, trademarks, copyrights, and customer lists.
The acquiring company does not acquire the target company as a whole; it only buys selected pieces. This type of acquisition allows the acquirer to cherry-pick the assets it wants, avoiding unwanted liabilities or parts of the business. However, it can be more complex than a stock purchase, as each asset must be individually valued and transferred, potentially requiring more due diligence.
2. Stock Acquisition
In a stock acquisition, the acquirer purchases the target company’s stock (shares) directly from its shareholders. If the acquirer obtains a majority of the voting shares (typically over 50%), it gains control of the target company. This approach is more straightforward to execute than an asset purchase, as it involves transferring ownership of shares. Still, the acquirer assumes all of the target company’s known and unknown liabilities.
3. Horizontal Acquisition
A horizontal acquisition involves acquiring a competitor in the same industry. Both companies offer similar products or services. These acquisitions are often pursued to increase market share, eliminate competition, achieve economies of scale, and gain access to new distribution channels or customer bases. These acquisitions are usually subject to scrutiny by antitrust authorities.
4. Vertical Acquisition
A vertical acquisition involves the acquisition of a company in the same supply chain. This could be a supplier (backward integration), a distributor (forward integration), or a customer. These are often pursued to gain control over the supply chain, reduce costs, improve efficiency, and ensure access to critical resources or distribution channels.
5. Conglomerate Acquisition
A conglomerate acquisition involves acquiring a company in a completely unrelated industry. The two companies have no direct business relationship. These are often pursued for diversification purposes, to reduce risk by spreading investments across different industries. It can also be motivated by financial engineering or the desire to acquire undervalued assets.
6. Congeneric Acquisition (Concentric Acquisition)
A congeneric acquisition involves the acquisition of a company in a related industry. The two companies may serve the same customer base or use similar technologies but offer different products or services. These are often pursued to expand product lines, reach new customer segments, or leverage existing brand recognition or distribution channels.
7. Reverse Takeover (Reverse Merger)
A reverse takeover occurs when a private company acquires a public company. This is often done as a way for the private company to go public without going through the traditional initial public offering (IPO) process. The private company’s shareholders typically receive a majority of the public company’s shares, effectively giving them control of the combined entity. The public company may then change its name and business to reflect the private company’s operations.
The Acquisition Process
The acquisition process typically involves several stages:
- Due Diligence: The acquirer conducts a thorough investigation of the target company’s financials, operations, legal standing, and other relevant factors.
- Negotiation: The acquirer and target negotiate the terms of the acquisition, including the purchase price, payment method (cash, stock, or a combination), and other key terms.
- Agreement: Once an agreement is reached, a formal acquisition agreement is signed by both parties.
- Financing (If Necessary): The acquirer secures the necessary financing to fund the acquisition, which may involve loans, issuing bonds, or using existing cash reserves.
- Regulatory Approvals: Depending on the industry and the acquisition size, regulatory approvals from government agencies, such as antitrust authorities, may be required.
- Closing: The acquisition is finalized, and ownership of the target company is transferred to the acquirer.
- Integration: The acquirer integrates the target company’s operations, employees, and systems into its organization.
Accounting for Acquisitions (US GAAP)
Acquisitions are accounted for under US Generally Accepted Accounting Principles (GAAP), specifically ASC 805, Business Combinations. Key aspects of the accounting treatment include:
- Identifying the Acquirer: Determining which entity is the acquiring entity.
- Determining the Acquisition Date: Establishing the date control of the target is transferred.
- Recognizing and Measuring Identifiable Assets Acquired and Liabilities Assumed: The acquirer must recognize and measure all identifiable assets and liabilities assumed in the acquisition at their fair values as of the acquisition date. This often involves valuing intangible assets such as customer relationships, patents, and trademarks.
- Recognizing Goodwill or a Gain from a Bargain Purchase: If the total consideration transferred (the purchase price) exceeds the fair value of the net identifiable assets acquired, the difference is recorded as goodwill. Goodwill represents the future economic benefits expected from the combination that are not separately identifiable. If, conversely, the fair value of net identifiable assets exceeds the consideration transferred, a bargain purchase gain is recognized.
- Transaction Costs: Costs directly related to the acquisition (e.g., legal, accounting, and consulting fees) are expensed as they are incurred and are not included in the acquisition cost.
Methods of Payment:
- Cash: The acquirer pays for the target company using cash.
- Stock: The acquirer issues its shares to the target company’s shareholders in exchange for their shares.
- Combination: Cash and stock are used to pay for the acquisition.
Ultimately, acquisitions are instrumental in helping companies achieve strategic goals such as growth, expansion, or new technologies.
