Corporate acquisition refers to the process by which one company purchases most or all of another company’s shares to gain control of that company. It is a strategic move aimed at expanding business operations, entering new markets, or acquiring new technologies. This process is a subset of a broader category known as Corporate Reorganization.
Types of Corporate Acquisitions
1. Friendly Acquisition
In a friendly acquisition, the target company’s management and board of directors agree to the terms of purchase.
2. Hostile Acquisition
A hostile acquisition occurs when the acquiring company goes directly to the target company’s shareholders or fights to replace management to get the acquisition approved.
3. Reverse Acquisition
In a reverse acquisition, a smaller company acquires a larger company and retains its name, often to quickly become publicly traded.
Special Considerations
- Valuation Methods: Various methods like Discounted Cash Flow (DCF), Comparable Company Analysis, and Precedent Transactions are used to value the target company.
- Legal and Regulatory Approvals: Acquisitions may require approval from regulatory bodies to ensure they don’t result in monopolistic market scenarios.
- Due Diligence: An exhaustive audit of the target company’s business is carried out to scrutinize financials, operational processes, legal standing, and asset base.
Examples of Corporate Acquisitions
Example 1: Facebook Acquires WhatsApp
In 2014, Facebook acquired the messaging service WhatsApp for approximately $19 billion to enhance its messaging services.
Example 2: Disney Acquires Pixar
Disney acquired Pixar in 2006 for $7.4 billion in stock, bringing together two giants in the animation industry.
Historical Context
Corporate acquisitions have been a key strategy for business expansion since the industrial revolution. Notable periods like the Roaring Twenties and the Tech Boom of the late 1990s saw a significant increase in these activities.
Applicability
Corporate acquisitions are applicable across various industries, including technology, healthcare, manufacturing, and finance. They help companies achieve growth targets, diversify product lines, and acquire new competencies.
Comparisons
Corporate Acquisition vs. Merger
- Acquisition: One company takes over another and establishes itself as the new owner.
- Merger: Two companies agree to combine and form a new entity.
Corporate Acquisition vs. Joint Venture
- Acquisition: Involves taking over the entire or a significant portion of the target company’s shares.
- Joint Venture: A collaboration between two companies to undertake a specific business project.
Related Terms with Definitions
- Merger: The combination of two companies to form a new entity.
- Asset Purchase: Acquiring a company’s assets rather than its shares.
- Takeover: Another term often used interchangeably with acquisition, though it can imply a more aggressive approach.
FAQs
What is the difference between equity and asset acquisition?
Equity Acquisition involves purchasing shares of the target company, while Asset Acquisition involves purchasing specific assets of the target company.
Why do companies choose to acquire other companies?
Companies acquire other companies for various strategic reasons, including gaining access to new markets, acquiring new technologies, achieving economies of scale, and eliminating competition.
References
- Ross, S.A., Westerfield, R.W., & Jaffe, J. (2018). Corporate Finance. McGraw-Hill Education.
- DePamphilis, D. (2019). Mergers, Acquisitions, and Other Restructuring Activities. Academic Press.
Summary
Corporate acquisition is a critical strategic tool in business expansion and competitive positioning. Whether friendly or hostile, the process involves meticulous planning, legal scrutiny, and can result in significant economic advantages for the acquiring company. Understanding the types, special considerations, and historical context helps in grasping the complexities and potential of corporate acquisitions in the modern economy.
