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. Acquisitions can be paid for in cash, in the acquiring company's stock or a combination of both. In any given year, however, far more small to medium-sized businesses merge with and acquire one another than do large companies.
Companies perform acquisitions for various reasons. They may be seeking to achieve economies of scalegreater market shareincreased synergycost acquisutions, 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 acquiaitions managementa brand name and other intangible assetsensuring that the acquiring company will start off with a good customer base.
Acquisitions are oltions 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 profitsthe large firm may look for optuons young companies to acquire and incorporate into its revenue stream. When an industry attracts too many competitor firms or when the supply from existing firms ramps up too much, companies may look to acquisitions as a way to reduce excess capacity, eliminate the competition, or focus on the most productive providers. If a new technology emerges that could increase productivity, a company may decide that it is most cost-efficient to purchase a competitor that already has optioms technology.
Research and development may be too difficult or take too much time, so the company offers to buy the existing assets of a company that has already gone through that process. In contrast, "acquisition" is frequently used to describe more amicable transactions, or used in conjunction with the word mergerwhere both companies usually of roughly equal size are willing to stocm together, sometimes to form a third company. Kptions can be either friendly or hostile.
Friendly acquisitions occur when the target firm expresses its agreement to be acquired. Hostile acquisitions don't have the same agreement from the target firm, and the acquiring firm must actively purchase large stakes of the target company to gain a majority. Friendly acquisitions often work towards a mutual benefit for both the acquiring and the target companies.
The companies develop strategies to ensure that the acquiring company purchases the appropriate assets, including the review of financial statements and other valuations, and that the purchase accounts for any obligations that may come with the assets. Once both parties agree to the terms and meet stock options and acquisitions legal stipulations, the purchase moves forward.
Unfriendly acquisitions, more commonly referred to as hostile takeoversoccur when the target company does not consent to the acquisition. In this case, the acquiring company must attempt to gather a majority stake to force the acquisition to go forward. To acquire the necessary stake, the acquiring company can produce a tender offer designed to encourage current shareholders to sell their holdings in exchange for an above-market value price. In either case, the acquiring company often offers a premium on the market price of the target company's shares to entice shareholders to sell.
For example, News Corp. When a firm acquires another entity, there usually is a predictable short-term effect on the stock price of qnd companies. In general, the acquiring company's stock will fall while the target company's stock will rise. The reason the target company's stock usually goes up is, of course, the premium that the acquiring company typically has to pay for the target.
The acquiring company's stock usually goes down for a number of reasons. First, as we mentioned above, the acquiring company must pay more than the target company currently is worth to make the deal go through. Beyond that, there are often a number of uncertainties involved with acquisitions. Here are some of the problems the takeover company could face during an acquisition: A purchasing company can finance an acquisition by raising private equityreceiving a bank loan or striking a mezzanine financing stock options and acquisitions that involves elements of both debt and equity financing.
Lenders have modified their criteria for providing credit by raising down payment requirements and carefully scrutinizing potential cash flow. Private equity financing often takes the form of venture capital — a professionally managed pool of funds that invest in high-growth opportunities — or private equity firms. This isn't always the case, but it has proven to be an effective means of raising stock options and acquisitions from dispersed sources and channeling them toward entrepreneurial opportunities.
Equity financing involves acquisitiions buyer company ajd securities acquisitiohs order to raise money, then using that money for both the acquisition transaction and to provide additional cash for the new company. Bank financing takes a variety of forms. The most common is to receive a cash flow-based loan, in which case the bank scrutinizes the cash flow, debt load and profit margins of the target company. If there is seller financing involved, the target company may take over the actual note after the opfions company makes the down payment.
Asset-based financing is another option. In an asset-based loan, the lender looks at the collateral the inventory, receivables and fixed assets of the target firm rather than the cash flow and debt loan. Before making an acquisition, it is imperative for a company to evaluate whether its target is a good candidate. In fact, officers of companies have a fiduciary duty to perform thorough due diligence before making any acquisition. The first step in evaluating an acquisition candidate is determining whether the asking price is reasonable.
Potential buyers should also examine the target company's debt load. What's been called the worst deal in the history of U. While most businesses face a lawsuit once in a while — huge companies such as Walmart get binary options eurchf several times daily — a good acquisition candidate is one that isn't dealing with a level of litigation that exceeds what is reasonable and normal for its industry and size.
A good acquisition target has clean, organized financial statements. AOL stocm Time Warner. Meanwhile, Time Warner was decried as an "old media" company, despite having tangible businesses publishing, television, et al. The relative importance of the two companies was revealed in the new entity's name, AOL Time Warner. A few years later, the companies cited irreconcilable differences and ended the marriage. Yet AOL's ephemeral takeover of Time Warner is merely the Western Hemisphere's record holder.
A few months earlier, British telecommunications company Vodafone completed a rancorous if not completely hostile takeover of German wireless provider Mannesmann. Vodafone offered and Mannesmann ultimately accepted. The deal would have been historic even without the superlative currency figure, as it represented the first foreign takeover in modern German history. Express Scripts and Medco. Worldwide acquisitions tailed off considerably in the ensuing decade.
In fact, the largest proposed acquisition of the period never even got off the ground. Continuing the parallel, T-Mobile is a subsidiary of Germany's Deutsche Telekom. Even though the deal was endorsed by parties as diverse as major special interest groups, most state attorneys general and multiple stodk unions, the U.
Department of Justice cited antitrust reasons and sued. The principals pulled out, leaving a far less publicized deal as the biggest buyout of the year. Both companies administer prescription drug programs, process and pay claims, and indirectly act as bulk purchasers for their millions of customers. Since the acquisition, it's estimated that one in three Americans now falls under the Express Scripts aegis. Most of the attention during sfock acquisition goes towards valuation, market shares and legalities.
Little notice is given to what happens in the aftermath, even though the success of an acquisition usually hinges on how the new company handles its many responsibilities. A new, logical corporate structure needs to be established. Resources need to be re-allocated towards their most valuable ends. Accounting processes and information have to be combined in a legal, tax-efficient way. Pre-existing business relationships should be re-assessed — including relationships with staff.
Except in rare cases, the acquiring company has stock options and acquisitions learn new operations, new customers and new suppliers. First and foremost, the new ownership needs to meet its new employees. These employees are likely to be anxious about their job status and a changing culture. It's the responsibility of new leadership to communicate effectively, make honest and fair decisions, and try to minimize the risks and costs involved in this transition.
The immediate financial information has probably been carefully considered, but now the reality of actually operating a new business is front and center. There are new logistics for the delivery of goods and services and for the integration of technology. When mergers involve large numbers of stock options and acquisitions employees, a new business command structure needs to be designed, articulated and executed.
Some companies decide to bring in third-party help to smooth this transition. This can be especially helpful for management that has never been involved in an acquisition before. Many won't care if mergers put money in shareholders' pockets and the customers' products and services don't see an interruption or decline acqusiitions quality.
Capital and cash need to keep flowing into the firm, or the rest doesn't matter. One mark of a successful acquisition: The acquiring firm or the new, combined entity displays higher earnings per share EPS than it previously had. If EPS is lower following an acquisition, it is considered dilutive. Term Of The Day Highly liquid assets held by financial institutions in order to meet short-term obligations.
ETFs: Diversification the Easy Way. Fred Wilson and Howard Lindzon on Securing the Blockchain. Financial Advisors Sophisticated acquisiions for financial advisors around investment strategies, industry trends, and advisor education. Three of Finance History's Largest Acquisitions.
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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.