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What Is Acquisition?

An acquisition occurs when one company buys out another company’s stock or other asset shares.

The acquiring/buying company becomes the owner of the company they purchased (i.e. the target company). In order for the acquisition to go through, the acquiring company must purchase at least 50% of the target company’s shares.

Acquisitions can be described as either hostile or amicable. If it’s hostile, the acquirer must go to the shareholders of the target company and get the acquisition approved. Management is bypassed in the hopes that shareholders are open to negotiation.

An amicable acquisition, however, is typically planned and the deals often please both parties.

Acquisition vs. Takeover vs. Merger

Acquisitions and mergers both have the same general end-game: one company eventually obtains another, hence why both mergers and acquisitions are a type of takeover.

Mergers differ slightly from acquisitions in that two companies choose to come together and blend their assets, forming an entirely new company, while an acquisition involves one company buying out ownership of the other.

A hostile takeover, however, occurs when a company purchases another company without the consent of the board of directors. A typical acquisition, on the other hand, while maybe not entirely wanted by management, does require the approval of the board of directors.

Why Do Companies Participate in Acquisition?

There are great reasons for companies - especially large corporate companies - to acquire target companies.

As a Way to Expand

Acquisition can simply be a means of growth, whether in the form of market share or as a way to grow the internal company itself through economies of scale.

During an acquisition, companies often gain technology and other resources it didn’t have before. Gaining these resources can help the acquiring company expand their reach and product offerings over the long term.

To Reduce Competition

When a company purchases another company, they’re both growing their product offerings and eliminating one element of their competition.

For example, Coach (a luxury design brand) bought Kate Spade, a smaller, similar brand. With this acquisition, Coach was able to expand into the younger fashion market, eliminating Kate Spade from their competition.

They now have new resources and branding at their disposal allowing them to compete more effectively in the market.

To Enter a Foreign Market

Just as an acquiring company would go through an acquisition to enter a new US market, a company could do the same thing to enter into a foreign market.

By acquiring a foreign target company, the acquirer may be able to expand their global reach, while already having an entire company set up overseas, eliminating part of the start-up cost.

To Cut Costs in the Long Run

When an acquisition occurs, the acquirer doesn’t just get a larger market share: They also obtain all of the company's resources. Rather than building a new brand or product from the ground up, the target company provides capabilities that are already available.

Real-World Acquisition Examples

Let's take a look at some real world examples of recent acquisitions.

Amazon and Whole Foods

Amazon bought Whole Foods in 2017 in an effort to compete with retail giant, Walmart and to expand into the grocery industry.

This is the perfect example of acquisition used as a means of growth. By acquiring Whole Foods, Amazon was able to enter an entirely new market and compete head-to-head with major industry players.

Sure, Amazon could have started their own grocery store chain but buying an existing company gets them to market much quicker - and with less competition - than starting from scratch.

Microsoft and LinkedIn

Microsoft acquired LinkedIn in 2016 for $196 per share, totalling $26 billion in an entirely cash deal. This was a great move for Microsoft, as shares of LinkedIn rose 64% soon after the acquisition occurred. This is a prime example of how acquisitions help within the market itself.

Procter & Gamble

Procter & Gamble has been building their brand since the 1980s by first acquiring Olay and Vicks. In a slightly more recent move, they acquired Gillette in 2005.

This is a great example of using acquisition to grow and eliminate the competitor, Procter & Gamble is now one of the largest corporations in the US.

Why Acquisitions are Important

A company will acquire a target company in order to implement growth and create a company that can offer more to both consumers and shareholders. Unlike a merger or hostile takeover, the acquisition includes buying the shares or assets of the target company (usually with cash or debt).

Big name companies like Amazon and Microsoft have used acquisitions to grow their brand and compete in a saturated market with heavy competition – and it often works well for the parties involved.

Ask an Expert about Acquisition

All of our content is verified for accuracy by Mark Herman, CFP and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Acquisition.

What Is the Purpose of an Acquisition Strategy?

A company creates an acquisition strategy to both determine whether a company is worth acquiring and – when it comes time for the acquisition – making sure the company’s processes and structure are set up to make the acquisition successful.

The purpose is to understand how buying a target company will help the parent company. If there isn't a way to gain efficiencies or grow via the acquisition, the strategy can quickly help management come to that conclusion.

There are a few different types of strategies that companies use, including:

Diversification Strategies

These involve adding another type of business or product to offset any risks the acquiring company currently faces.

Full Service Strategies

These can help the company increase the number of services it offers by obtaining a company that already offers them and has expertise in that area.

Sales Growth Strategies

This is the most common type of acquisition strategies and involve buying another company to help grow the business internally.

What Is Acquisition Financing?

Acquisition financing is the capital that the acquirer gets in order to make the process happen.

With a cash acquisition, market shares are often purchased in exchange for cash, such as the Microsoft and LinkedIn example above. This process typically occurs with smaller target companies that are looking to cash out.

Debt financing is another common acquisition financing method. While many companies aren’t able to pay a large lump sum of cash, they may take out a loan in order to purchase the target company. The caveat here is that both the acquiring company and the target company’s assets are examined in order to secure the loan.

Since securing financing is a complex system with reasonable risk, the acquirer will most often secure funds from multiple banks.

Mark Herman, CFP
Mark Herman, CFP
Expert Certificate

Master of Business Administration (M.B.A.)

Member of the Board, Financial Planning Association of Austin

Mark Herman has been helping friends with financial questions since serving as an Army helicopter pilot. Since then, he’s gained valuable experience in the corporate world before moving on to become a Certified Financial Planner™