Acquisition is a business transaction in which one company buys out another to gain ownership rights and control over the acquired firm’s operations and assets. It’s a common growth strategy, and it can happen either with the consent of the target company (a friendly acquisition) or against it (a hostile takeover). Acquisitions can be structured as asset purchases, stock purchases or mergers, with each type offering unique advantages and considerations for acquirers.
Companies make acquisitions for a variety of reasons, from boosting market presence in new territories to cutting costs through acquisitions that feed into the parent company’s supply chain. As the fifth merger wave continues to unfold, acquisitions are often happening across industries to smooth out cyclical bumps and provide greater diversification in an investment portfolio, as well as to expand a firm’s capacity to serve customers.
A company that seeks to make an acquisition should clearly define its objectives and criteria on paper. This helps to avoid mispriced acquisitions as the acquiring firm tries to “cherry-pick” assets it wants from the acquired firm. It’s also important to understand how different valuation methods can yield varying results.
A key consideration is whether the firm making an acquisition needs to take on the acquired firm’s debt or if it can finance the deal through its own cash reserves. As a result, it’s critical to check out business loan eligibility before pursuing an acquisition. Then, the business can determine its ability to pay for a potential acquisition before beginning negotiations with a prospective target firm.