Acquisition

Financial Dictionary -> Investing -> Acquisition

The business phenomenon of acquisition is one of the most popular financial operations since the development of the free market. Think of natural selection. This is the oldest law on Earth as far as wildlife's existence is concerned, but, it has also found an extensive application in the global financial jungle of our century, where only the fittest companies are privileged to survive and prosper, while the not so fit ones are 'eaten' or, in other words, acquired by the bigger fishes. Giants rule over the world again.

Were we in the jungle, the stronger tribe, which in our case is the management team of the bigger company, would simply invade the camp of their weaker rivals, which in this case should be the headquarters of the acquired company, and physically destroy them and their property, taking all valuables for themselves. But because we are securely vested in thousands of years of civilization, which are not so easy to shed off our shoulders, the picture of the whole deal called 'acquisition' is much more agreeable. Armed with annual reports and other financial papers, instead of tomahawks and machetes, the management team of the buyer will march into the headquarters of their colleagues from the smaller company. They will sit at the table in the general meetings hall, grin in the faces of their poor colleagues, hand them the papers, and say with their mildest possible tone: 'Ladies and gentlemen, we have noticed that your enterprise is experiencing some financial difficulties lately and, to prevent your employees from unexpected layoffs, we have come to take full control over your company. As of today, your company shall operate as a fully-owned subsidiary of our company, as we are buying out all of your shares and assets for, say, one billion US dollars'.
Sounds much nicer, doesn't it?

By definition, an acquisition is a process whereby one company or the target is bought out by another company. Further, an acquisition may be full, when the acquirer buys out a hundred percent of the acquiree's shares, or partial where it buys only a part of its shares. These, however, will always be larger than fifty per cent of the acquiree's assets. Also, we can speak of public acquisition when the acquiree's shares are listed on a stock exchange and of private when they are not. Depending on how it has been announced, an acquisition can also be friendly, if the acquirers have presented themselves as the rescuers of the sinking company, and hostile, if they have come as the conquerors.

It should be noted that there is a difference between mergers and acquisitions. When certain business entity takes over another one, clearly establishing itself as the new owner, the transaction is referred to as an acquisition. On the other hand, a merger occurs when two business entities decide to function together in the form of a new entity, rather than being run and owned separately. To put in more precise terms, this action is called merger of equals, with both companies being of roughly the same size. In reality, such mergers do not happen often. In the typical case, one business entity will buy another and let the acquired company announce it as a merger, though it's in fact an acquisition.

Finally, all talks concerning acquisitions are held in a so-called confidentiality bubble, as to prevent unwanted leaks of inaccurate information to the shareholders and employees of the target company, before a final decision is reached.